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HARTFORD, CT — Office of Policy and Management Secretary Ben Barnes is not sugarcoating a $450 million drop in income tax receipts.

“It’s bad news,” Barnes said Thursday in a phone interview.

To put it in perspective $450 million is more than the $235 million the state currently has in its Rainy Day Fund, which means the administration and lawmakers will have to take extreme measures such as pushing some of the deficit into next year, which will grow the current $1.7 billion deficit, or borrow to cover the shortfall.

In the meantime, Barnes has ordered a hiring freeze and asked agency commissioners to stop contracting for any services.

All of this is being done before Monday when budget analysts will convene to agree on just how far revenues will deteriorate.

“It would have been unreasonable for us not to identify the elephant in the room,” Barnes said.

In a letter to state agency heads, Barnes wrote that the administration needs to “take actions to prepare for layoffs that may be necessary in the event we cannot reach either a new labor agreement or a balanced budget.”

The budget for next fiscal year assumes Barnes will find $700 million in labor savings. If he’s unable to deliver then it would be necessary to layoff about 4,200 state employees.

Barnes said the administration will do whatever they can to reduce spending.

However, he worries about the negative impact using borrowing to close a budget hole would have on the state’s finances, but it’s also not desirable to push it off until fiscal year 2018, which will fall another $500 million short in revenue if the drop in income tax receipts is carried forward.

The tax package adopted Thursday by the Finance, Revenue, and Bonding Committee would increase revenues, $155.7 million in 2018 and $89 million in 2019. Most of the increase comes from a program that would help the state collect more delinquent taxes by waiving penalties and forgiving half the interest for tax scofflaws.

The Finance Committee package adopted Thursday on a bipartisan basis also doesn’t take into account the declining revenue estimates announced by Barnes.

What happened? Why are income tax receipts declining?

The estimates and finals portion of income tax collections came in 10 percent below expectations. Barnes said they only estimated 2 to 3 percent growth for that income tax category, which generally includes high-wealth individuals with investment income.

Barnes said there are no good answers for why they fell so far below expectations.

Department of Revenue Services Commissioner Kevin Sullivan said his colleagues in New York and Massachusetts are seeing the same trend of declining receipts. A lot he suspected has to do with uncertainty about the tax structure at the federal level.

Republicans have argued two of the largest tax hikes in Connecticut’s history over the past six years have driven residents out of the state.

Connecticut has been losing population every year since 2013. 

According to U.S. Census data, more than 575 Connecticut residents per week are packing up and moving out of Connecticut.  Between July 1, 2015 and July 1, 2016, Connecticut’s total resident population fell by 8,278 people.

Barnes acknowledged there is an out migration issue that he worries about. He doesn’t doubt that high net worth individuals look at the state’s budget situation and see the likelihood of a future tax increase.

However, Barnes said ‘relying on raising taxes is not producing effectively for us.” He said he would be reluctant given the state’s outmigration patterns to consider any sort of broad based income or sales tax increase.

At the same time, it’s hard to see a balanced budget without tax increases, some lawmakers have said.

“I don’t know if there’s any possibility of not having some sort of revenue increase,” House Speaker Joe Aresimowicz, D-Berlin, said Thursday. “But I’m willing to explore that.”

Barnes said he’s disheartened that both the Republican and Democratic budget proposals dispense with some of Gov. Dannel P. Malloy’s ideas for raising revenue, such as allowing cities and towns to tax the real property of hospitals and shifting part of the teacher pension costs to municipalities.