COMPTROLLER LEMBO PROJECTS
$44.6-MILLION DEFICIT DUE TO SLOW INCOME TAX WITHHOLDING AND CAUTIOUS OUTLOOK ON FINAL PAYMENTS
FOR IMMEDIATE RELEASE
Comptroller Kevin Lembo today announced that, due to slow income tax withholding revenue and concerns about final April payments, he is projecting that the state could end the current fiscal year with a $44.6-million deficit.
Lembo once again cautioned that earlier surplus projections relied on the optimistic view that final income tax payments in April will outperform estimated income tax payments collected earlier in the fiscal year, despite historic trends, due to certain stock market changes.
In a letter to Gov. Dannel P. Malloy, Lembo said that he agrees with a recent income tax projection by the Office of Fiscal Analysis, which is $60 million below the January consensus forecast relied on in recent months.
“The withholding portion of the income tax, which accounts for over 60 percent of total income tax receipts, has been weakening in recent months,” Lembo said. “In addition, estimated income tax payments through February were below last fiscal year’s receipts. The final income tax receipts will be available later in April. As in past fiscal years, it is likely that the final April payments will alter General Fund projections.
“I would be happy to be wrong,” Lembo said.
Lembo explained that it’s typical for April final payments to trend in the same direction as the estimated payments made during the fiscal year. However, because of stock market corrections and subdued bonus payments in the 2015 tax year, a large number of taxpayers may be eligible to utilize safe harbor provisions of the tax code. The safe harbor provisions allow taxpayers to delay the payment of their full 2016 tax liability until April of 2017 (rather than incorporating the payment into their fourth-quarter 2016 estimated payments).
While there may be reason to hope that - due to the safe harbor provisions - final payments will trend higher than estimated payments - Lembo said it’s better to exercise caution.
“I am concerned that these delayed payments may not be sufficient to reach the OPM (Office of Policy and Management) estimate,” Lembo said.
As for spending, Lembo said he projects that spending will exceed the budget plan by $18.1 million, which is somewhat higher than what OPM is projecting because Lembo said he believes ongoing settlement payments in the case of SEBAC v. Rowland have the potential to outpace initial budget plans.
“However, it should be noted that total General Fund spending through February was trending below both of these spending projections,” Lembo said. “If this trend holds through the remainder of the fiscal year, expenditures should be at or below the budget target, thus reducing the deficit projection.
“Connecticut’s overall budget performance is ultimately dependent upon the performance of the national and state economies,” Lembo said.
Lembo pointed to latest available economic indicators from federal and state Departments of Labor and other sources that show:
• In Fiscal Year 2016 the withholding portion of the income tax increased 3.4 percent from the prior fiscal year. Through February of Fiscal Year 2017, these receipts were up 1.8 percent from last year. Adjusting for timing differences between fiscal years in deposit days by month, the withholding tax trend has been running below last fiscal year and decelerating in recent months.
• According to 2016 benchmark revisions by the U.S. Bureau of Labor
Statistics, Connecticut lost 200 jobs in calendar year 2016. After strong 1st
quarter employment growth, the employment situation in the state became more
erratic. The final quarter of 2016 posted a net loss of jobs.
• U.S. employment has been advancing at a rate of 1.6 percent over the
12-month period ending in February; Connecticut’s employment growth has been 0.1
percent over that same period.
• Connecticut’s 4th quarter results for 2016 were better than the full year
results. The 4th quarter growth annualizes to a rate closer to 4 percent, which
ranked the state at 21 nationally for 4th quarter growth.
• According to a March 22 release from CT Realtors, Connecticut single-family
residential home sales decreased by 4.2 percent in February 2017 from the same
month a year earlier. The median sales price of a home declined by 2.2 percent
to $225,000. This is a single month reversal to a prevailing trend. Connecticut
has been in a sustained period of sales volume gains since 2012; prices were
also rebounding in recent months. Townhouse and condominium sales also declined
with the median price remaining flat.
• Retail spending growth advanced 0.1 percent in February from the previous
month, and 5.7 percent from February of 2016. Just four of the 13 major retail
categories saw gains in February sales.
• The results in February were held down in part by a 0.2-percent drop in
sales at auto dealers. Auto purchases account for about one-fifth of all retail
• According to TransUnion’s Industry Insight report for the 4th quarter of
2016, the average mortgage balance reached a post-recession high of $194,415 in
that quarter. The mortgage delinquency rate concluded 2016 at 2.28 percent, and
has now declined every quarter on a quarter-over-quarter basis since the 3rd
quarter of 2013.
Business and Economic Growth
• According to the March 30 third estimate from the Bureau of Economic
Analysis, real GDP in the 4th quarter of 2016 grew at a 2.1-percent annual rate.
This is an improvement from the second estimate that put growth at 1.9 percent.
The growth rate in the 3rd quarter was 3.5 percent.
• For all of 2016, profits rose 4.3 percent after falling 8.5 percent in
2015. Earnings fell in 2015 as exports declined on a strengthening dollar,
energy prices and other commodity prices softened and global growth weakened.
But oil prices stabilized last year and the global outlook has brightened,
helping bolster U.S. businesses.
• The Department of Labor’s Business Economic Scorecard tracks the up and down movement in some key indicators for the state including: housing permits, air cargo, exports, gaming slots, visits to major attractions, air passenger count, the CT manufacturing production index and average weekly manufacturing hours. As the graph shows, the current recovery has not been as strong as the last recovery period. Between late 2003 and 2006 there were no negative readings. This recovery has seen sporadic negative results, but still well above the recessionary period.
• Estimated and final income tax payments account for approximately 40
percent of total state income tax receipts. Both the estimated and final
payments had a negative rate of growth in Fiscal Year 2016.
• The equity markets have experienced some recent volatility, but at this writing are showing year-to-date gains.
Read the Comptroller's Full Letter
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