CTNJ file photo
State Comptroller Kevin Lembo (CTNJ file photo)

State Comptroller Kevin Lembo wants to stabilize the state’s rainy day fund and temper the volatility of the tax structure by creating a “recessionary seawall.”

Lembo, who will be sworn into a second term on Wednesday, said the proposal he will unveil next week seeks to siphon off portions of some of the most volatile taxes in order to build up the state’s budget reserve for future crises.

“Connecticut’s high concentration of individual wealth and corporate headquarters — and the related impact of ups and downs on Wall Street — contribute to large fluctuations in revenue as economic conditions change,” Lembo said. “These revenue fluctuations create significant revenue shortfalls when the economy is under-performing, resulting in tax increases, program cuts, or both.”

Connecticut, according to Standard and Poors, is one of the top 10 states most reliant on revenue from the income tax, which also is one of the most volatile taxes.

During his first-term, Gov. Dannel P. Malloy was able to build back up the rainy day from from nothing to about $519 million, but Lembo believes the rainy day fund should function as more than a simple savings account.

“It can also be an important tool for building predictability into the state’s General Fund revenue stream to protect against large fluctuations,” Lembo said Wednesday.

“I am proposing a recessionary seawall that will limit the need for crisis-driven tax increases and program cuts during economic downturns. Connecticut has an opportunity to carve out a new era of fiscal stability and responsibility — by strategically managing revenue volatility and building a sound Budget Reserve Fund.”

Reports by the Pew Research Center and the Nelson Rockefeller Center for Government have found that it’s gotten increasingly difficult for states to estimate revenues and those poor predictions are making it more difficult to budget with any certainty.

But it’s not clear yet if the Malloy administration is on board with Lembo’s proposal.

“This is an interesting idea that has been tried in other states,” Office of Policy and Management Secretary Ben Barnes said Wednesday. “It is difficult, though, to come up with a mechanism that would tie the hands of future legislatures while giving enough flexibility to respond to unmet state needs. I certainly welcome Comptroller Lembo’s contributions.”

Lembo’s proposal, which will be unveiled next week as part of a white paper, will establish automatic deposits whenever the most volatile tax revenue streams produce one-time excess revenues.

Lembo said three tax revenue streams are particularly volatile because of the demographic and economic makeup of Connecticut: the estimated and final payments portion of the income tax, the corporation business tax, and the inheritance and estate tax.

“Connecticut currently has no established policy for maintaining its Budget Reserve Fund — relying mostly on good fortune over the decades to set aside, or not set aside, unanticipated windfalls,” Lembo said. “In the past two recessions, reserves have been inadequate to fill revenue shortfalls — despite several missed opportunities to harness unexpected windfalls prior to those recessions.”