Christine Stuart photo

After budget analysts counted up all the revenue Wednesday, they discovered next year’s budget falls nearly $300 million short of where analysts anticipated it would be at the beginning of the year.

Budget analysts concluded that the state will end this fiscal year with a $43.3 million surplus, which is about $462 million short of the $505 million surplus it predicted in January. The fiscal year 2015 budget was based January revenue estimates which ended up being poor predictors of Connecticut’s fiscal future. That means lawmakers will be left to plug a nearly $300 million hole.

The dive in revenue numbers was related mostly to the fact that income tax revenue wasn’t as robust as predicted. Corporation taxes were revised downward by $44.2 million and sales tax projections were revised downward by $22.6 million. The Malloy administration is attributing the decline in sales taxes to “the impact of this winter’s weather and certain federal policy efforts.”

“We believe this is due to several tax law changes at the federal level at the beginning of calendar year 2013. These tax law chances made it advantageous for investors to realize capital gains in 2012, likely resulting in a significant decline in such realization in 2013,” Office of Policy and Management Secretary Ben Barnes said in a memo.

In a visit to the Capitol press room, Barnes said the January numbers showed a 5 percent increase in estimated income taxes over the previous year. Estimated income taxes are filed on a quarterly basis by residents who are self-employed or have unearned income.

“Every year since the income tax was put in place in the early ‘90s, if estimated tax payments were rising, the final payment would rise,” Barnes said. “This is the first time in the history of the state of Connecticut in the era in which we’ve had this tax structure that the estimates went up and the final payments went down.”

Barnes said they were “taken off guard by that,” but at the time felt it was “conservative” based on historical trends.

As a result of declining revenues, Democratic Gov. Dannel P. Malloy canceled plans for a $55 tax refund to 2.7 million taxpayers. Also, the $100 million in additional funds from that anticipated $500 million surplus won’t be deposited in the state employees’ pension fund.

Democratic lawmakers remained optimistic that they could handle the drop in revenue.

“I think things have brightened up a little bit at the end here,” Senate President Donald Williams said Wednesday. “We’re still going to have a surplus it’s just not going to be as large as we thought it was.”

But there’s also a handful of things that have happened since Malloy and legislative Democrats presented their budgets. There was $18 million in magnet school funding tied to a court settlement agreement got left out of the governor’s budget, and the federal court told the state it needs to hire 35 more eligibility workers in the Social Services Department.

“It appears that we’re pretty close to finding a way to manage any potential shortfall next year within existing programmatic resources,” House Speaker Brendan Sharkey said Wednesday.

Hugh McQuaid photo

Republican legislative leaders viewed the situation as more dire. They said the numbers should motivate Democrats to include the minority party in its budget negotiations. House Minority Leader Lawrence Cafero said Republicans intend to offer their own ideas when the budget is raised for a floor debate within the next week.

Cafero said they were still working on what those policies might look like. He said they would start by looking at new spending proposed in this year’s budget.

“As far as I’m concerned, everything that’s in the budget is fair game. We have a problem, we have to face it head on and it’s not going to be pretty, but that’s what we have to do,” he said.

Senate Minority Leader John McKinney said he was not sure why the administration did not anticipate the drop in revenues and insisted for months the budget would have a $500 million surplus.

“My assumption is they either weren’t asking the right people the right questions or they just didn’t want to,” he said.

Republicans also said the declining tax revenues will have political consequences because they illustrate a dismal fiscal picture for voters, who will go to the polls in November to decide whether Malloy should be re-elected for a second term.

McKinney, who is one of several Republicans seeking the nomination to run against Malloy, said the numbers confirm the position of many voters who believe the state’s economy has not improved despite talk of a budget surplus.

“This just now really eliminates any ability for the governor to go out and beat his chest about budget surpluses, solving the problems, because he hasn’t solved the problems,” he said.

Legislative leaders from the two budget writing committees have been behind closed-doors all week seeking to cut spending or defer tax breaks they planned to give to various individuals. 

It’s unclear at the moment what lawmakers will target for cuts or which taxes will remain on the books.