Probable State Budget Surplus Masks Ongoing Problems

Connecticut may end fiscal year 2013 with a $236.6 million surplus fueled in large part by big–but probably one-time–gains in the state’s inheritance and estate taxes. That’s according to the latest estimates released July 1 by the state comptroller, with the fiscal year’s complete budget story to be officially told in September. 

Late last year, with Bush-era tax policy set to expire, many affluent people in the state made significant transfers of wealth in order to avoid higher gift tax rates as of Jan. 1, 2013. That kind of revenue windfall (helping to generate $269.8 million above budget in the inheritance and estate taxes) is not expected to be seen again in the current fiscal year that began July 1.

Also performing better than anticipated in FY 2013 were revenues from the state’s personal income tax ($183.8 million). Sales and corporate taxes, on the other hand, underperformed by $189.33 million and $66 million, respectively.

In his statement on the budget, the comptroller noted that the economic recovery continues to plod along. Just over three years into the recovery, Connecticut has gained back only half the jobs lost during the recession. And while job growth in the state seems to be picking up of late, the unemployment rate remains static at 8%.

Businesses continue to urge lawmakers to see the strong link between the state’s fiscal and economic health. They were disappointed that the new state budget for fiscal years 2014 and 2015 increased spending by about 7.5%, extended three business taxes that were set to expire, and included myriad one-time revenues and increased borrowing.

Precisely because of these budgetary tactics, which they said increase Connecticut’s “budget vulnerability,” Fitch Ratings Service recently revised its outlook for the state from “stable” to “negative.” (Fitch also, however, retained the state’s AA rating, which is a favorable score.)

Getting the state into better fiscal shape will have a lot to do with restoring the kind of business confidence that leads to greater investments in the state and more robust job creation.

For more information, contact CBIA’s Bonnie Stewart at 860.244.1925 or bonnie.stewart@cbia.com.