State Comptroller Nancy Wyman’s latest assessment of the budget found that state government remains $500 million in deficit, which is still an estimated $200 million more than predicted by Republican Gov. M. Jodi Rell’s budget office.

In her monthly letter to Rell, Wyman, a Democrat, predicted that Connecticut will end 2010 with a budget deficit of $513.3 million—a modest improvement over last month.

The $36.2 million improvement in the deficit was due to a net increase in revenues of $9.4 million and net spending reductions of $26.8 million, Wyman said. Most of the revenue improvement is related to the sale of unclaimed state property that brought in $58.4 million.

However, income tax collections are still down.  According to Wyman the income tax, the state’s single-largest source of revenue, will yield under $6.4 billion this year, or $212 million less than originally projected. 

The downward trend is driven by the loss of more than 88,000 jobs in Connecticut since the recession began in March 2008 and the increase in the tax on Connecticut’s wealthiest citizens is not helping to increase revenues.

“The revenue gain associated with the income tax rate increase is just sufficient to offset the negative trending in income tax collections, which leaves my estimate close to the Fiscal Year 2009 receipt level,” Wyman wrote in her letter to Rell. “Sales tax receipts are expected to be more than 6 percent off of last year’s collections.”

“Until the state stops losing jobs and the payroll taxes that go with them, this deficit will continue to present difficult challenges for policymakers,” Wyman said in a press release.

But Wyman also warned that the state can’t blame all its problems on the global economic crisis.

“While the economic downturn exacerbated the budget imbalance, the state was facing deficits even in the absence of a recession,“ Wyman wrote. “Any meaningful deficit reduction plan must focus on permanently realigning revenues and expenditures, and it must ensure that any future revenue windfalls are not used for ongoing spending initiatives that cannot be sustained in the long term.”

Last month Rell vetoed the Democrat-controlled legislature’s attempt to mitigate the budget deficit by delaying the reduction in the estate tax and cutting spending by $12.4 million. When Rell vetoed the measure she said the legislature only nibbled away at the problem instead of addressing it.

If the legislature had adopted Rell’s mitigation plan the deficit would have been “largely mitigated,” Wyman said. And if Rell had approved the legislature’s plan it would have provided about $115.9 million in deficit relief to the state.

Meanwhile, Wyman raised concerns about the projected overspending on social services.

The state agency running largest deficiency is the Department of Social Services, Wyman wrote in her letter to Rell. The deficiency is tied to the department’s “inability to implement budgetary cost saving measures within the budget’s estimated time frame,” Wyman wrote. “One such measure is a reduction in managed care rates, which was a cost savings that you included in your own budget proposal.“

Rell’s budget office along with the Department of Social Services have said they are currently in the middle of negotiating with the three managed care providers to find the $50 million in savings. Since the negotiations are ongoing no one was able to comment on if any progress has been made.