HARTFORD, CT — It doesn’t resolve the current fiscal crisis, but Senate Democrats are proposing limiting the amount of revenue it projects from part of the state income tax.
The proposal would cap the estimates and finals portion of the income tax, which budget analysts have struggled to predict over the past few years, at $3.1 billion. Any revenue below that cap would be used for general budget spending, and any revenue above that amount would be dedicated to the Rainy Day Fund or used to pay down debt.
The state is on the verge of wiping out the $235.6 million in its Rainy Day Fund to balance the current fiscal year’s budget. The proposal, if it’s adopted, is expected to reduce spending about $30 million in the year following its enactment.
“This is a structural reform that will have a greater impact in the out-years,” Senate President Martin Looney, D-New Haven, said.
It doesn’t impact the current $389.8 million deficit or the $5.1 billion deficit lawmakers are struggling with at the moment.
Sen. Cathy Osten, D-Sprague, said it closes the door before the state spends money in the future.
“It’s saying to the Appropriations Committee, no matter what the Office of Fiscal Analysis gives us as a projection this particular revenue stream, you cannot spend more than $3.1 billion from this category,” Osten said.
The proposal is similar to one state Comptroller Kevin Lembo proposed in 2015 along with the conservative Yankee Institute for Public Policy. That proposal applies a formula that requires automatic deposits into the Rainy Day Fund whenever revenue from the corporation tax and the same portion of the personal income tax exceed historic norms. It also increases the cap on the fund from 10 percent to 15 percent of net general fund appropriations. The proposal will go into effect in 2020.
Asked about the Senate proposal, Lembo said “this action recognized the urgency of establishing state budget predictability and stability. It’s unfortunate that when my initiative passed in 2015 its effective date was delayed to 2020.”
Lembo added that he’s happy to assist them in their efforts.
“It’s not unreasonable to project that by 2025 we will be at 65 percent of overall expenditures crowding out our ability to fund critical programs,” Sen. John Fonfara, D-Hartford, said.
He said the plan will require discipline, but doing nothing “will have a devastating impact.”
Looney said the fixed costs are a larger and larger part of the state budget and lawmakers will be paralyzed if the future if the revenue stream continues to be volatile. The estimates and finals portion of the state income tax, which is paid by small business owners and financiers who earn income from capital gains, is more volatile than the withholding portion of paychecks because it relies on wealthy individuals realizing earnings from their investments.
Department of Revenue Services Commissioner Kevin Sullivan said that the stock market performing well so those who have a lot of money invested in it “sell and buy,” and that doesn’t immediately turn into money for the state of Connecticut.
What’s compounding the problem currently, Sullivan added, is that a lot of the country’s wealthiest are waiting to see if President Donald Trump’s promised tax cuts come through, so again money is being “parked.”
But it’s not just “parked” money that is hurting Connecticut’s coffers, Sullivan said.
The concept has bipartisan support.
Rep. Chris Davis, R-East Windsor, said on its face the proposal is something to consider.
“Looks very similar to House Republican proposals in the past,” Davis, who is the ranking Republican on the Finance, Revenue, and Bonding Committee, said.
He said it’s certainly an idea they’d be willing to take a look at.
Senate Republican President Len Fasano, R-North Haven, was a little less generous in his reaction to the proposal.
“The irony today is that all of a sudden the individuals whose policies damaged our state are now trying to be fiscal conservatives,” Fasano said. “Today’s press conference was an effort to deflect from the fact that Democrat lawmakers have yet to show any clear path out of the disaster they created.”
But he said he would work with Democrats on fixing the state’s budget, if they “are open to rethinking their policies that have damaged our state, if they offer a complete line-by-line biennial budget, and if they actually pursue the significant long-term and short-term structural changes they have rejected in the past.”