Latest State Revenue Surge Expands Budget Options
Connecticut’s current fiscal picture brightened further this week, with this year’s budget surplus now projected at almost $4 billion.
The Office of Policy and Management April 20 forecast a $3.95 billion surplus for fiscal 2022, $1.2 billion more than the surplus it predicted just a month ago.
The surplus includes $2.1 billion in the General Fund and $1.87 billion through a savings program the legislature adopted in 2017 to build the state’s reserve fund.
Under the bipartisan budget reforms enacted in 2017, the rainy day fund balance is capped at $3.1 billion, with additional revenue allocated to paying down the huge unfunded state employee pension liabilities.
Small Business Tax Surge
Among the sources driving surging state revenues? A tax on small businesses.
Revenues from the state’s pass-through entity tax—implemented in 2018 to help small businesses mitigate the federal $10,000 cap on state and local tax deductions—are up $700 million this year.
That tax is offset by a corresponding tax credit, which the legislature and administration reduced to 87% a year after implementing it, costing the state’s small businesses $53 million.
CBIA has called for the credit to be restored to its original 93% level to support small businesses struggling to recover from the pandemic.
CBIA also supports extending the state’s research and development tax program to small businesses, although legislation supporting that did not advance beyond the Finance, Revenue, and Bonding Committee.
The Senate did approve legislation April 21 requiring a study by multiple state agencies on the impact of expanding the R&D tax credit to small businesses.
The Lamont administration and legislative leaders are currently negotiating revisions to the current fiscal year.
The General Assembly’s Appropriations Committee approved a $24.2 billion budget April 7 for fiscal 2023, increasing spending by 8% over current levels.
The committee’s budget invests about $125 million in childcare and provides additional workforce development funds, but fails to provide any relief for businesses facing a 22% hike in unemployment taxes.
Continuing last year’s funding theme, the committee’s budget relied on a combination of optimistic revenue projections and one-time federal American Rescue Plan Act funding.
There was also a wide gap between that proposal and the Finance Committee’s budget, which drew criticism for circumventing both the statutory spending and revenue caps.
The committee retained the majority of Gov. Ned Lamont’s tax relief proposals, which included increasing the property tax credit from $200 to $300, expanding eligibility, and accelerating the phase-in of the pension and annuity income tax exemption.
Legislative Republicans released a $1.2 billion tax relief proposal April 21, including the first state income tax rate reduction in 27 years.
The GOP proposal also extends the current gas tax suspension beyond June 30, temporarily lowers sales tax rates, and allocates $225 million toward the state’s current $463 million unemployment fund debt.
Despite the continued surge in state revenues, Connecticut does face significant projected budget deficits, beginning in fiscal 2024.
The Office of Fiscal Analysis projects state budget deficits of $931.9 million in 2024, $670.3 million in fiscal 2025, and $326.6 million in fiscal 2026.
CBIA president and CEO Chris DiPentima said it was critical that policymakers maintain fiscal discipline while supporting key investments in the state’s recovery from the pandemic.
“Let’s make investments in our economic recovery through meaningful workforce development programs, paying down the Unemployment Trust Fund debt, and supporting small businesses,” he said.
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