Comptroller Kevin Lembo said the state is on track to end fiscal year 2018 with a $224 million deficit, up from the $207.8 million he estimated on Dec. 1. Lembo also warned about long-term ramifications of a new federal tax law that he said will disproportionately shift an even greater share of the federal tax burden on high-income states like Connecticut.
In a letter to Gov. Dannel Malloy, Lembo cited various factors that could again affect his 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, he noted, tax professionals suspect that this is only a short-term increase as residents seek to prepay taxes before new limits on the State and Local Tax deductions take effect in the 2018 tax year.
“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,” he said. “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,” Lembo said, “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.”
On the plus side, 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, which measures how closely the 50 state economies match the ideal structure of the innovation-driven new economy.