Comptroller Kevin Lembo said Tuesday that the state’s deficit has grown to $224 million this fiscal year, despite a bump in income tax payments over last December.
Lembo said that surge in income tax revenue is likely the result of wealthier residents looking to make those payments ahead of tax changes for 2018, and he warned that recently approved federal tax reforms could make the budget shortfall worse.
The $224 million deficit, an increase from the $207 million shortfall Lembo predicted just a month ago, exceeds the threshold that requires Gov. DannelP. Malloy to submit a plan to the legislature for approval.
Lembo said in his monthly letter to Malloy that tax professionals suspect income tax payments, which “far outpaced” those in December 2016, came from those looking to prepay their levies before federal changes in 2018 cap the State and Local Tax, or SALT, deductions.
“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.”
Because the caps on SALT deductions didn’t take effect until this year, they have no impact on tax bills due in April, but will in 2019.
Lembo also said the reforms could hurt Connecticut, which receives back only 87 cents of every dollar it pays in federal taxes, when it comes to funding improvements and initiatives.
“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,” he said.
Lembo did say that some market indicators show the potential for positive employment trends, despite the state losing 3,500 jobs in November.
He said Connecticut saw modest growth in its financial services sector, population remained essentially unchanged in 2017 after years of decline, and the state ranked 10th in a recent report that “measures how closely the 50 state economies match the ideal structure of the innovation-driven new economy.”
Lembo’s deficit projection was $1.5 million more than the figure from Malloy’s budget office in mid-December, but Lembo said the difference is the result of a recent settlement with Cheshire regarding payments for water service to a prison.
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