HARTFORD, CT — Connecticut’s income tax collections plummeted at the end of April leaving Connecticut with a gaping $5.2 billion hole in its budget for this year and the next two fiscal years.
Revenues are down about $413 million this fiscal year, and another $597 million and $865 million in fiscal year 2018 and 2019, according to the latest estimates. That means the budget hole lawmakers and Democratic Gov. Dannel P. Malloy will have to fill after depleting the $235 million rainy day fund is about $5.2 billion.
“The precipitous drop in revenue we experienced in late April creates major challenges for the state throughout the remainder of this fiscal year and into the next biennial budget we are currently working on,” Office of Policy and Management Secretary Ben Barnes said Monday. “We need to take immediate action to reduce spending between now and June 30 to reduce our current year deficit as much as possible to prevent the need to borrow to meet expenses.”
The revenue from Connecticut’s top 100 taxpayers was down 45 percent, according to budget analysts.
Personal income tax revenues were down $450 million from projections.
More specifically, a majority of the decline in the income tax receipts is from the withholding and finals portion of the tax, which is tied to capital gains and investment income. That part ended up being down 8.9 percent.
“This is the second consecutive year of negative growth in this portion of the revenue,” according to the nonpartisan Office of Fiscal Analysis.
The paycheck withholding portion of the income tax grew 2.2 percent.
House Minority Leader Themis Klarides, R-Derby, said there’s a reason Connecticut’s top 100 taxpayers are down 45 percent in their income.
“The reason is they’re not paying taxes here anymore,” Klarides said.
Republican lawmakers maintain millionaires are fleeing Connecticut after the two largest tax increases in the state’s history.
However, Department of Revenue Services Commissioner Kevin Sullivan has said there’s a similar trend in states that are dependent on high income earners. He said the stock market might be performing well, but the high net worth individuals were reluctant to invest or realize capital gains in 2016. But he added that the trend is not unique to Connecticut.
At an earlier press conference, Malloy acknowledged the out migration, but refused to attribute it to the decline in income tax receipts from the top 100 taxpayers.
“Do I believe that discussion of tax policy, the likes of which have taken place or our over reliance, in some senses on the wealthiest, can be perceived as a negative? Yes,” Malloy said. “That’s why I’ve attempted not to engage in that type of rhetoric quite frankly.”
He said he believes when people turn 60 or 70 they move to warmer climates, but didn’t comment on whether he thought that migration patterns were tied to tax policy.
He said the top one percent pays about 30 percent of the income tax revenue in Connecticut.
It’s a volatile revenue source and makes the state subject to “pretty big swings” in revenue generation.
The Working Families Party, which supported Malloy’s 2010 and 2014 campaigns, has been advocating for changes to how the hedge fund industry is taxed.
Malloy said the “mere mention” of increasing taxes some 19.6 percent on the hedge fund industry could be detrimental to Connecticut’s bottom line.
“Be careful about what you’re saying about them,” Malloy cautioned lawmakers.
He said the hedge fund industry is “important” and generates a lot of revenue for the state of Connecticut.
“We should stop that kind of discussion, quite frankly,” Malloy said.
Malloy said he would work to reduce spending in order to bring the budget he presented back in February into balance.
Senate Republican President Len Fasano, R-North Haven, said that a $5 billion deficit over a two year period is “staggering.”
Republicans have said they will revise their budget to reflect the new revenue figures.
Republican and Democratic legislative leaders will meet Tuesday with Malloy for their first budget negotiation.