Slow Job Growth, Higher Spending Signal Budget Risks

Connecticut set a jobs record in June, with payroll employment reaching an all-time high of 1,726,500, according to the state Department of Labor’s monthly report.

The positive results capped a first half of the year in which employers added 9,500 positions—8,600 more than in all of 2025. 

However, it is important to keep in mind that we took many years to get there, and that slow climb is important for more than just the economy.

The income tax withheld from paychecks, often a predictable source of revenue, has grown slowly as a result of weak job growth while the state budget has continued to expand.

The difference has been covered by the money the state can least predict from one year to the next, and current policy is pointed toward relying on more of it. 

A Long Road 

Employment is up 4.5% since fiscal 2012, rising from a fiscal-year average of 1,641,300 to 1,715,600 in fiscal 2025. Annualized, that comes to about 0.34% a year.

The gain since fiscal 2019 is roughly 1%, and Connecticut did not recover its pre-pandemic job count until fiscal 2024.  

Beyond the implications for the economy, the slow growth in the job market presents significant challenges for the budget.

Over those same 13 years, the withholding revenue portion of the income tax grew only 11.5% in real terms, from $7.36 billion to $8.2 billion in fiscal 2025 dollars.

That works out to roughly 0.84% a year. 

The slow growth is partly explained by income tax cuts that went into effect in fiscal 2024. However, after adding back the rate reduction, real growth still only comes to an estimated 16.7% over 13 years. 

Ultimately, the withholding tax only grows when more people are employed, or wages rise.  

The Source of Growth

Stagnating withholding revenues combined with rising budget obligations mean the state’s budget relies more heavily on volatile revenue sources.

Estimated payments, final payments, and the pass-through entity tax together increased, on an inflation-adjusted basis, from $4.2 billion in fiscal 2012 to $6.08 billion in fiscal 2025.

That’s 43.3% growth over the period, a compound annual rate of 2.81%, or more than three times the pace of withholding. 

The consequence of tax policy over the past 15 years has resulted in a budget that is far more reliant on volatile revenues from the PIT.

Share of General Fund tax revenue	FY2012	FY2025	Change
Withholding	38.2%	40.5%	+2.3pp
Volatile (estimates, finals, PTE)	22.%	30.0%	+8.0pp
Personal income tax, total	60.2%	70.5%	+10.3pp

Of the 10.3-point rise in the income tax’s share of General Fund taxes, eight points came from the volatile component. That is roughly 78% of the shift, with withholding accounting for the rest. 

The general sales and use tax, another more stable source of revenue, fell from 26.6% of General Fund tax revenue to 22.6%, in part as these revenues were shifted off budget to shore up the STF.  

The shift in revenue sources comes at the expense of increased volatility exposure in the budget.

While, withholding rarely moves more than 5% in either direction from one year to the next, volatile receipts have ranged from a 28% real decline to a 42.8% real increase, a 70-point spread, and depending on the measurement window they run 3.8 to 7.1 times as volatile.

They also fell more frequently, declining in seven of the 13 years against four for withholding. 

Policy Is Pointed the Same Way 

Current policy efforts look likely to further expose the state budget to volatility. 

The volatility cap plays an important role by protecting the state budget from volatility, limiting lawmakers in what they are able to spend.

However, the 2026 budget adjustment bill raised the fiscal 2026 threshold by $813.7 million as a one-time adjustment—keeping that money in the General Fund—and the same package required the governor to declare a fiscal emergency to lift the statutory spending cap by $85 million.

A special session in 2025 had already raised the threshold by roughly $800 million.

Meanwhile, multiple proposals have been made to capture a greater portion of those revenues. Our budget process is further entrenching our reliance on these volatile sources. 

Our budget process is further entrenching our reliance on these volatile sources.

Additionally, proposals to increase taxes on the wealthy, while driving more revenue, increase exposure to volatile revenues.

High-income households disproportionately derive income from volatile sources like the stock market. Utilizing these new revenues to reduce taxes, either on property or lower income households, further exposes more of the economy to shocks. 

As it stands, the state projects that 2026 continued the trend of greater reliance on volatile revenues.

The April consensus revenue estimates from the Office of Policy and Management and the Office of Fiscal Analysis project fiscal 2026 volatile receipts up about 17%, against withholding growth of roughly 5.6%.

Out years in the projections suggest flat or declining volatile revenues and rising withholding revenues, which would require a strengthening job and wage picture. 

What This Means for Employers 

Volatile revenue is legitimate revenue.

The difficulty is that it cannot be forecast reliably, which leaves any budget built on it exposed to financial markets.

Long-run stagnation in the job market has limited the state’s ability to invest in its people. 

Weak job growth has left us more reliant on these revenues to fund the government, exposing our budget and economy to new risks. 

It is good to celebrate Connecticut’s recent job growth, but long-term stagnation in the job market has limited the state’s ability to invest in its residents. 

Sustainable support requires sustainable budgets, and while one hopes recent trends in the job market continue, its clear that achieving our fiscal goals will be challenging without growing the base of taxpayers. 

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About the author: Dustin Nord is the director of the CBIA Foundation for Economic Growth & Opportunity.