Sobering’ Deficits: Governor Plans Spending Cuts, Cancelling Tax Relief

Gov. Ned Lamont plans tax relief cancellations and spending cuts—including labor savings—as the coronavirus pandemic drives ballooning multiyear budget deficits.

Connecticut faces a $934 million deficit for the current fiscal year, a $2.3 billion gap next year, and a $4 billion-plus shortfall in fiscal 2022 and 2023.

“The numbers are sobering,” Lamont said at a May 1 briefing.

“COVID has been tough on our physical health, it’s been tough on our mental health, and it’s been tough on our fiscal health.”

Connecticut is currently expected to receive $1.4 billion in federal aid, but those funds are limited to coronavirus reimbursement, not economic restoration. 

Lamont said he was “planning for the worst, hoping for the best” when asked if states could expect additional federal aid.

Revenue Forecasts

State budget director Melissa McCaw expects a 26% drop in revenues from the pass-through entity tax and capital gains tax. 

The closure of non-essential businesses has led to 35% of employers that pay sales and use taxes suspending operations, resulting in a 5% decline in that revenue stream.

Gov. Ned Lamont warned Friday he will cancel tax relief and impose $400 million in emergency spending cuts to mitigate the multi-billion-deficit projected for the upcoming fiscal year. https://t.co/k3fjRQTe1w

— Connecticut Public (@wnpr) May 1, 2020

Corporate tax revenue is predicted to decline 14%.

McCaw said the administration will draw from the state’s $2.5 billion reserve fund to close the current year deficit.

“I’m sorry to ask everybody, but we’re going to have to do a little more on this fiscal front,” Lamont said.

Business Taxes

The administration is considering a mix of spending cuts, tax relief cancellations, and reserve funds to address the fiscal 2021 deficit.

McCaw said about $100 million in previously approved tax cuts could be cancelled, including:

• Corporate tax surcharge phase out ($23 million in fiscal 2021; $60 million annually after that)
• Eliminating the business entity tax ($44 million);
• Ending the capital stock tax ($6 million);
• Expanding the angel investor tax credit expansion ($5 million)

Those tax measures, along with $400 million in FY 2021 spending cuts the administration plans to negotiate with the state legislature, could realize $500 million in savings next year.

The administration would then use the balance of the reserve fund to close the rest of the deficit.

Fiscal 2022-2023

When the legislature then returns next January for the 2021 General Assembly session, policymakers will face a projected $4 billion, two-year deficit.

Lamont said he wanted to hold taxpayers and service providers “harmless” in resolving that deficit.

“We’re going to have to streamline things, make some cuts, and work with our friends in labor,” he said.

“We’re going to have to streamline things, make some cuts, and work with our friends in labor.”

Gov. Lamont

The governor also warned the state’s Special Transportation Fund will run out of money by July next year because of the pandemic’s significant impact on gas tax revenues.

“I’m going to work in collaboration with the legislature to see what we can do about our Special Transportation Fund,” he said.

“We’ve got a year to do it and we ought to do it right.”