COMPTROLLER LEMBO PROJECTS $224-MILLION DEFICIT;
WARNS OF FEDERAL TAX CHANGE CONSEQUENCES FOR CT
FOR IMMEDIATE RELEASE TUESDAY, JANUARY 2, 2018
Comptroller Kevin Lembo announced today that the state is on track to end Fiscal Year 2018 with a $224-million deficit, and he warned about long-term ramifications of a new federal tax law that will disproportionately shift an even greater share of the federal tax burden on high-income states like Connecticut.
In a letter to Gov. Dannel P. Malloy, Lembo explained that his deficit projection is slightly higher than the most recent projection by the state Office of Policy and Management (OPM) due to a recently approved $1.5 million settlement between the state and the Town of Cheshire. Lembo also acknowledged factors that could change this projection, including an updated consensus revenue report due later this month and anticipated legislative action on the governor's proposed deficit mitigation plan.
In the short term, Lembo said that the December 2017 estimated and final payment component of the income tax has significantly outpaced the prior year’s December receipts – however, tax professionals suspect that this is only a short-term increase as residents seek to pre-pay taxes before new limits on the State and Local Tax (SALT) deductions take effect in the 2018 tax year. Lembo said the long-term consequences may be problematic for states like Connecticut.
"Federal tax changes – particularly the federal SALT deduction – will likely have long-term consequences for Connecticut," Lembo said. “Even as Connecticut lags the nation in pace of economic growth, its already disproportionate federal tax burden will grow, forcing Connecticut to fund growth in other states at the expense of our own residents.
"Connecticut pays more federal taxes per capita than any state in the nation – making it a so-called 'donor state,' according to a recent report by Federal Funds Information for States (FFIS). While places like Mississippi, Alabama, West Virginia, New Mexico and the District of Columbia receive far more federal dollars than they pay, Connecticut receives only 87 cents back for every tax dollar sent to Washington, D.C. (ranking Connecticut 46th in what it receives in per-capita federal spending).
"New federal tax changes will now worsen this disparity and likely have long-term consequences for states like Connecticut, impairing the ability of Connecticut state and local governments to afford essential investments in infrastructure, education and workforce training that are necessary to drive economic growth.
"These federal tax changes raise basic questions of fairness for high-income states like Connecticut and fly in the face of the tax bill's stated goals."
Connecticut continues to struggle through job loss and only modest earnings growth – however, Lembo said that some of the latest positive economic indicators deserve watch. Lembo noted modest growth in financial sector jobs, some relief after persistent population loss (Connecticut’s population remained essentially the same between 2016 and 2017), and a new report that found Connecticut ranked 10th in the nation in a 2017 State New Economy Index by the Information Technology and Innovation Foundation (ITIF) that measures how closely the 50 state economies match the ideal structure of the innovation-driven new economy.
Lembo pointed to the latest economic indicators from federal and state Departments of Labor and other sources that show:
• In its monthly Labor Situation publication, the Connecticut Department of
Labor (DOL) reported the preliminary Connecticut nonfarm job estimates for
November from the business payroll survey administered by the US Bureau of Labor
Statistics (BLS). The report showed the state lost 3,500 net jobs (-0.2 percent)
in November 2017, to a level of 1,677,500, seasonally adjusted. In addition,
October’s originally-released job loss of 6,600 was revised upward to a loss of
6,200 for the month.
• DOL reports that November 2017 seasonally adjusted average weekly initial
unemployment claims for first-time filers in Connecticut increased by 566
claimants (16.8 percent) to 3,931 from October 2017, and were lower by 87 claims
(2.3 percent) from the November 2016 level of 3,844.
Payroll Employment Trend
The 2017 State New Economy Index
• Connecticut was recently ranked 10th in the nation in the 2017 State New
Economy Index by the Information Technology and Innovation Foundation (ITIF).
This index measures how closely the 50 state economies match the ideal structure
of the innovation-driven new economy. According to ITIF, the new economy is
characterized by strength in knowledge jobs, participation in globalization and
the digital economy, economic dynamism, and innovation capacity. Connecticut was
included in the top ten for exceling in traded services, employing a highly
educated workforce, receiving high amounts of foreign direct investment, and for
the level of research and development activity.
• November 2017 average hourly earnings at $31.01, not seasonally adjusted,
were up $0.44, or 1.4 percent, from the November 2016 estimate. The resultant
average private sector weekly pay amounted to $1,054.34, up $24.13, or 2.3
percent higher than a year ago.
• In its Dec. 7 release, Berkshire Hathaway HomeServices reported results for the Connecticut housing market for November 2017 compared with November 2016. Sales of single family homes declined 2.81 percent. However, the median sale price rose 1.43 percent. New listings in Connecticut decreased by 2.61 percent and the median list price remained unchanged at $250,000. Average days on the market increased nearly 10.88 percent in November 2017 compared to the same month in the previous year. The table below contains more detailed data for the Connecticut market.
• The following chart from Berkshire Hathaway HomeServices shows the total number of Connecticut single family homes for sale in November 2017 distributed by list price:
• Estimated and final income tax payments account for approximately 35 to 40
percent of total state income tax receipts. Both the estimated and final
payments had a negative rate of growth in both Fiscal Years 2016 and 2017.
• To date, shifts in equity portfolio allocations following the presidential
election and a run-up in equity values have not resulted in the expected level
of capital gains related revenue increases for the state.
• Consumer spending is the main engine of the U.S. economy, accounting for
more than two-thirds of total economic output. The Commerce Department reported
that advance retail sales increased a robust 0.8 percent in November 2017 from
the previous month. On an annual basis, retail sales grew by 5.8 percent
compared with November 2016.
Consumer Debt and Savings Rates
• According to the Federal Reserve Bank of New York, aggregate household debt
balances rose to another new peak in the third quarter of 2017. As of Sept. 30,
2017, overall debt – including mortgages, auto loans and student loans – hit a
record $12.96 trillion. This increase put overall household debt $280 billion
above its peak in the third quarter of 2008, and 16.2 percent above its trough
in the second quarter of 2013. Aggregate household debt balances have now
increased in 13 consecutive quarters.
• The U.S. consumer confidence index (CCI), published by the Conference
Board, is an indicator designed to measure consumer confidence. This is defined
as the degree of optimism on the state of the economy that consumers are
expressing through their activities of savings and spending.
Business and Economic Growth
• According to a December 21st release from the Bureau of Economic Analysis, U.S. Real Gross Domestic Product increased at an annual rate of 3.2 percent in the third quarter of 2017 based on BEA’s third estimate. The economy continued to show resilience despite concerns that the major hurricanes in August and September would dampen economic output. In the second quarter, real GDP increased 3.1 percent.
• BEA reported that the increase in real GDP in the third quarter reflected
positive contributions from person consumption expenditures (PCE), private
inventory investment, nonresidential fixed investment, and exports. These
increases were partially offset by negative contributions from residential fixed
investment. Imports, which are a subtraction in the calculation of GDP,
decreased in the third quarter.
• According to a Dec. 22 report by the U.S. Department of Commerce, new
orders for durable goods in November increased $3.1 billion or 1.3 percent to
$241.4 billion. This increase, up three of the last four months, followed a
0.4-percent October decrease.
• The Dec. 14 Markit Flash Purchasing Manager’s Index (PMI) reported that
December data pointed to divergent trends across the U.S. private sector
economy, with a slowdown in services growth more than offsetting a robust and
accelerated upturn in manufacturing output. As a result, the seasonally adjusted
IHS Markit Flash U.S. Composite PMI Output Index dropped to 53.0 in December,
from 54.5 in November.
Read the Comptroller's Full Letter
View PDF for Economic Indicators|