Christine Stuart file photo
State Capitol (Christine Stuart file photo)

Budget analysts predicted that over the next two years revenue will drop more than $488 million, creating new challenges in negotiations over a state budget that doesn’t increase taxes.

The governor’s budget office and the legislature’s nonpartisan Office of Fiscal Analysis released their consensus revenue estimates Tuesday concluding that revenue will drop $259 million in 2014 and $229.4 million in 2015.

“This presents Connecticut with some real challenges in finalizing a budget, but I am confident that we will work with the legislature to come to a responsible and balanced budget plan,” Office of Policy and Management Secretary Ben Barnes said in a statement.

The report also concluded that the state will end this fiscal year with a $150.1 million surplus. Barnes asked last week that any surplus from this fiscal year go into the Rainy Day Fund. The Connecticut Conference of Municipalities and the Connecticut Hospital Association are just two groups hoping any surplus would be used to reduce the cuts that will impact their members.

But Barnes warned lawmakers Friday not to get too giddy about a possible surplus this year.

“Until an updated revenue estimate for FY 2014 and FY 2015 is completed, we should remind those that have an eye on any surplus that we are in a very different time from the years before the recession when prosperity drove surpluses every year,” Barnes said Friday. “Today, we are not yet in a position to predict with sufficient confidence that economic recovery will produce lasting increases in revenue collections.”

The additional personal income revenue the state is seeing this year as a result of changes at the federal level won’t recur in 2014 and 2015. It’s income from capital gains and dividends individuals are cashing in as a result of changes to federal tax law, according to Barnes.

When he proposed his two-year, $43.8 billion budget in February, Gov. Dannel P. Malloy didn’t raise any major new taxes and increased spending 9.7 percent. The legislature’s Democrat-controlled Appropriations Committee released its budget earlier this month with a spending increase of about 10 percent over the next two years and shifted some of the funding priorities. The Finance, Revenue, and Bonding Committee adhered to Malloy’s call not to raise taxes and even restructured its borrowing to allow a tax implemented two years ago to expire.

But things are changing rapidly and the economy isn’t following historic trends.

Since Malloy prepared his budget based on the consensus revenue estimates in January, analysts have predicted personal income tax revenue will drop $143.6 million in 2014 and $69.3 million in 2015. Sales and use tax predictions also are down about $75.1 million in 2014 and $104.9 million in 2015, according to the latest report.

House Minority Leader Lawrence Cafero, R-Norwalk, has said the state never pivoted in 2012 to revise its overly optimistic revenue projections, which date back to Malloy’s first budget in 2011. That’s the year Malloy increased taxes $1.5 billion, and changed the state’s relationship with its employee unions in order to close a $3.7 billion deficit.

At that time, Malloy’s administration never anticipated it would be fending off future deficits as big as $1 billion, but that’s where it finds itself after a January hiring freeze and a December deficit mitigation plan.

On Wednesday, Malloy maintained his pledge not to raise any new taxes.

“I’ve been very clear. I’ve been telling you for months we’re not going to raise taxes and we are not going to raise taxes,” Malloy said.

He maintained that his budget which increases spending 9.7 percent actually cut spending and those spending cuts in 2014 will carry over to 2015.

“Let’s focus on what the yearly shortfall is,” Malloy urged reporters.

Cafero said the new revenue report shows that the budget will be in deficit about $1.4 billion in 2014 and $1.7 billion in the second.

“It shows the economy is not turning around,” he said.

Cafero said what the state needs to do is spend less money.

Even though he didn’t raise any major new taxes, Malloy continued several taxes expected to sunset June 30, in order to close a two-year, $2.2 billion budget deficit.

Malloy’s budget extended a 20 percent surcharge on the corporation tax, a tax on electric generating facilities, and maintained a cap on an insurance premium tax credit. Collectively, the three tax extensions raise about $153 million in new taxes in 2014.

The Finance, Revenue, and Bonding Committee eliminated the tax on electric generators, which was expected to bring in about $76 million a year.

The decision upset Republican lawmakers who are generally against taxes.

“I refuse to believe that the state’s only options are an unfair tax today, or borrowing and paying higher interest tomorrow,” Sen. Minority Leader John McKinney has said. “The state needs to cut spending.”

It’s unclear if the current revenue projections will prompt the Democrat-controlled legislature and Democratic governor to sit down and start over, but Barnes described the new revenue projections as “conservative.”