With so many businesses closed and people out work, Connecticut is not getting the tax revenue it’s used to.
“The numbers are sobering. I’ve got to tell you that COVID has been tough on our physical health, it’s been tough on our mental health, and it’s also tough on our fiscal health,” said Gov. Ned Lamont on Friday.
Sales tax revenues are projected to be down 14% and income tax down 10% in the fiscal year that starts July 1.
“We have a significant number of unemployed individuals in this state and we immediately begin to see a reduction in income tax withholding,” said Office of Policy and Management Secretary Melissa McCaw.
McCaw said that industries temporarily shuttered by the coronavirus crisis comprise 35% of Connecticut’s sales and use tax revenues.
“This is going to be difficult for everybody, no question,” said Republican House Minority Leader Themis Klarides.
The state has a $20 billion budget, but now projects just $18 billion in revenues, leaving legislative leaders with a $2 billion hole to fill.
“I think this has to be a serious conversation with all of us, sitting down and having it,” said Klarides.
People are staying home from work, not driving as much, and gas prices keep falling. Originally expected to become insolvent three or four years down the road, Connecticut’s Special Transportation Fund, which relies heavily on gas tax revenues, is now forecast to run out of money in a year. The governor once proposed tolls to shore it up. He was careful not to suggest that on Friday.
“There’s no capacity to just bond and bond and bond for it. There’s really no capacity to take it from the rainy-day fund,” he said when asked if he would borrow more for road work.
The $1.9 billion rainy day fund is now expected to be the state’s major solution to filling the budget gap, but it won’t be enough according to McCaw.
“Look, I’m sorry to ask everybody. We’re going to have to do a little more, all of us on this fiscal front,” said Lamont during his daily news briefing on Friday.
Lamont said the state was on track until the coronavirus hit.
“I’m not sure we’re going to be able to promise a lot of new tax cuts or a lot of new spending increases but we’re going to try to do the best we can to hold that harmless,” he said.
Lamont said he planned to call the state’s labor unions to the table but wouldn’t give specifics on what he’ll ask them to do.
“I’m going to be asking them to help with the pain that we’re all sharing in the state right now.”
Friday, state employees received a letter informing them that union leaders planned to meet with the governor. Their contract calls for a raise for all state employees July 1. Republicans want to freeze it.
“We’re not saying don’t give them the raise at all. We’re saying suspend it for a few months until we see what kind of fiscal ground we’re on,” said Klarides.
Nonprofits, which depend on state funding, are also worried about what will happen to them as the state looks to fill a $2 billion budget gap on July 1.
“If we’ve learned anything through this crisis it’s that a decade or so of under-funding of nonprofits has made it very difficult for them to respond to this crisis. We know that another crisis is coming in the fall and unless funding is there, non-profits may not be,” said Gian-Carl Casa, president and CEO of the CT Nonprofit Alliance, which represents 300 nonprofits.
Connecticut has received more than $1 billion from the federal government to cover Covid-related costs like testing supplies, not revenue shortfalls. Lamont said he hoped the feds would step in to help, but said he was looking for more dependable solutions.
One is to freeze the corporate tax relief the state had planned.
“The goal is not to do damage to our tax constituents at a time when they’re trying to rebuild and recover,” McCaw said.
She did point to a couple of bright spots. She said real estate inquiries are up and sales are expected to grow by 8.5% this year.
McCaw said the economy should recover more quickly than the last downturn. She pointed to economists who are forecasting the recession to end in the summer of 2021.