COMPTROLLER LEMBO PROJECTS $452.6-MILLION SURPLUS FOR FISCAL YEAR 2019
Comptroller Kevin Lembo said the latest projection is an increase over last month’s outlook, largely due to an improved revenue forecast across several categories, including the withholding portion of the income tax, sales and use tax and gaming revenue.
In a letter to Gov. Ned Lamont, Lembo said that his surplus projection is slightly lower than the state Office of Policy and Management’s (OPM) recent projection due to his belief that expenditures in the Adjudicated Claims account (the account used to pay SEBAC v. Rowland claims and other negotiated settlements) will be higher than OPM’s projection.
Lembo said he also believes that the estimated payments portion of the income tax will be lower than projected by the state’s consensus forecast, although that difference will have no impact on the surplus (it would, however, affect the amount transferred to the state’s Budget Reserve Fund at the end of the year).
“Due to timing, my office has been able to analyze two additional weeks of receipts in this category (estimated payments) after OPM issued its most recent letter,” Lembo said. “Based on this information, I’m reducing my projection for estimated payments by $100 million due to lower-than-expected collections in the December and January timeframe. My office will continue to assess new information as it becomes available and revise this projection as needed in future months.”
The state’s latest consensus forecast, reached Jan. 15 by OPM and the state Office of Fiscal Analysis (OFA), revised revenues upward by a net $197.1 million over the previous month’s estimate. The largest change is a $79.3-million improvement in the sales and use tax, which has been running ahead of budget target in part due to collections related to online sales. Lembo said OPM attributes this increase to the U.S. Supreme Court’s decision in Wayfair, Inc. v. South Dakota, which held that states may charge sales tax on purchases made from out-of-state retailers, even if the seller does not have a physical presence in the taxing state.
The consensus forecast also increased the projection for the withholding portion of the income tax by $75 million, which is consistent with job gains, lower unemployment and signs of accelerated wage growth, Lembo said. Lembo said gaming payment revenue was also revised upward by $25 million, reflecting an assessment that competition from the new casino in Springfield, Mass. is having less of an impact than anticipated in the budget.
Lembo said the estimate for the inheritance and estate tax was also revised upward by $20 million, although tax refunds are running ahead of the budget plan, which lowers revenue by about $20 million.
Regarding the lower outlook for estimated and final collections, Lembo said he had anticipated a drop-off in December receipts due to the new $10,000 federal limitation for the State and Local Tax (SALT) deductions because that change reduced the incentive for taxpayers to make payments before calendar year-end.
“My office would have expected somewhat higher collections though throughout January if the December results just reflected a change in the timing of payments,” Lembo said. “Instead, January collections were more in line with typical results from earlier years. Going forward, the impact of federal tax changes and the stock market’s negative performance in 2018 may have substantial impact on estimated and final payment collections for the balance of Fiscal Year 2019.
“As a result, the April tax collection period will take on added significance for this year’s budget results,” Lembo said.
Lembo reported the latest status involving the Budget Reserve Fund (BRF), following the state’s new statutory revenue volatility cap that requires revenues above a certain threshold to be transferred into the fund:
For FY 2019, the cap is $3.19 billion for estimated and final income tax payments and revenue from the newly enacted Pass-through Entity tax.
If Lembo’s projections hold, a $548-million volatility transfer would be made to the BRF at the end of the year. The current balance of the BRF is $1.18 billion. Adding Lembo’s estimated $548-million volatility transfer and the projected FY 2019 surplus of $452.6 million, would bring the year-end balance of the BRF to just under $2.2 billion, or approximately 11.5 percent of General Fund expenditures.
“This result, if achieved would represent a significant improvement over the recent past and move the BRF closer to the statutory target of 15 percent,” Lembo said.
“A number of forecasts for the coming year are predicting slower growth for the United States and other major economies. Therefore, it is essential that Connecticut continue to build a strong balance in the BRF to protect against any future downturn.
“Connecticut’s overall budget results are ultimately dependent upon the performance of the national and state economies. I should note that the recently-ended federal government shut-down has delayed certain economic updates for this month’s report. However, the available economic indicators, especially around the job and housing markets, include the following trends...
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