Much weaker than expected state income tax revenues have nearly evaporated a projected state budget surplus for this fiscal year and made the budget outlook grimmer for the next two.

Wednesday, consensus revenue estimates from the Office of Policy and Management and the Office of Fiscal Analysis revealed a projected $500 million surplus this year has slimmed to just $43.4 million.

What’s more, the declining tax revenue has led to a projected $351 million deficit for fiscal year 2015, and a $1.39 billion gap in fiscal year 2016.

Tax receipts are down in all of the major categories, but the biggest factor in the revenue gap is the personal income tax. The state is now expecting $8.632 billion in personal income tax receipts for the current fiscal year, compared with a projected $9.021 billion last January. 

Immediately at stake for lawmakers is closing the deficit for fiscal year 2015, the second year of the current biennium. The administration and legislature must arrive at a solution before the General Assembly adjourns next Wednesday, May 7, at midnight.  

“Despite solid gains on Wall Street,” said CBIA economist Pete Gioia, “it appears that those gains aren’t translating into the revenue anticipated. It’s now an extremely thin surplus for this year and a much bigger problem for lawmakers for the next two budget years.”  

Given the volatile nature of income tax revenues, Gioia said that policymakers must work to put the state on more solid fiscal footing by “building a better business climate, which will translate into a stronger economy, more job creation, and real gains in more predictable payroll tax growth.” 

Before the latest revenue projections, lawmakers were considering proposals made by Gov. Malloy to use this year’s anticipated $500 million surplus to provide $155 million in tax rebates, devote an extra $100 million for the state’s pension obligations, and salt away $250 million into Connecticut’s Rainy Day Fund.

Now, none of those actions are likely, although the administration said whatever surplus dollars the state does realize will be put in the Rainy Day Fund.

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