Tax collection declines cost CT $3 billion a year

January 4, 2019

Connecticut coffers would have been $3 billion fatter per year if the growth rate of tax collection in the Malloy era had matched the early to mid-2000’s, and that means state budget shortfalls would not exist at all.

That new calculation comes from the state Office of Policy and Management, Gov. Dannel P. Malloy’s budget unit. And the breakdown by taxes is consistent, showing a slowing of collections across all three major categories.

”I’m sure we would have found ways to spend the money or hopefully some tax cuts, but just to give you an idea of the scale,” said Manisha Srivastava, an economist at OPM who presented the numbers in Hartford Friday at a conference of the Connecticut Business and Industry Association — the $3 billion represents more than 15 percent of the general fund.

The scale is massive by any measure, as annual collection rates of the state’s major taxes have all slowed in the Malloy era compared with the pre-recession years.

Paycheck withholding, adjusted for annual refunds, grew by a compounded average annual rate of 3.6 percent between 2011 and the estimate for this year, the new figures show. That compares with an average of 6.6 percent in the years from 2003 to 2008.

Withholding, the bulk of the state personal income tax, represents the largest single source of revenue for the state, between $6 billion and $7 billion a year.

The sales and use tax, which accounts for about $4 billion, has grown by an average of 2.5 percent a year in the Malloy era, compared with 3.5 percent in 2003-08.

The category known as “estimates and finals” a portion of the income tax that basically covers capital gains, other financial gains and some large income windfalls, is by far the most volatile.

Flattening out the years, Srivastava’s analysis showed an average annual gain of 5.4 percent in the Malloy era, with 2018 turning in a heady 41.5 percent. Not bad, right? In fact, that gain is largely responsible for a rainy-day fund estimated to reach as high as $2.5 billion by the end of the current fiscal year, June 30.

Well, the average figure was 18.9 percent in 2003-08, with consistent gains as the stock markets ran up wealth ahead of the Great Recession.

There, in a nutshell, with those three pairs of numbers, is Connecticut’s budget crisis — rarely illustrated in such precise terms covering the various eras.

”The problem was, the economic downturn was a lot worse than imagined and it hit high-income earners especially hard,” said Peter Gioia, an economics consultant working for CBIA.

Gioia recalled that the 2011 tax increase was meant to put the state’s fiscal woes behind us and enable Malloy and the General Assembly to move forward with investments in transportation and cities as tax collections resumed.

”That was Malloy and Ben Barnes’ plan,” Gioia said, referring to Barnes, the state’s chief budget official for Malloy’s entire 8-year tenure. “So instead of being a one-and-done silver bullet, it didn’t work.”

Why it didn’t work is a matter of debate that will never be solved.

And it’s not like the 2003-08 growth period was freakish. In fact, it was smaller than the gains of the previous economic boom, 1996 to 2001. In that period, state withholding grew at a compounded annual rate of 10.5 percent and the sales tax grew by 6.9 percent a year, Srivastava’s analysis shows. Estimates and finals averaged a 17 percent gain in the ’96 to ’01 period, lower than the early to mid-2000s but still far ahead of the Malloy era.

So why didn’t Connecticut find a way to cut into its pension and heath care liability crisis back in those years? As I recall, it seemed like a budget crisis every year back then as well, at least from 2000 on.

The tax collection rates shown in the research are so-called economic rates of growth, meaning they take out the effects of any tax increases or cuts. The great debate is whether Malloy’s tax increase of about $900 million in 2011 - or higher-depending on how you measure it - caused tax collections to decline because people and companies moved out of the state, or because Connecticut was entering a turbulent period that would lead to what Barnes called a perpetual fiscal crisis.

What we know is this: If Connecticut’s tax collections had come just a little bit closer to the historic normal, the recent election would not have been close and Gov.-elect Ned Lamont would be fighting legislators over the size of the tax cut.

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