As income tax revenues collected from the state's top taxpayers continue to plummet, Connecticut now faces a projected drop in income tax revenue of $1.46 billion in the next two fiscal years.
This adds to an estimated drop of $413 million in tax revenue for the current fiscal year — pushing the projected deficit for the current year to nearly $390 million, according to figures released by office of Gov. Dannel P. Malloy and the nonpartisan Office of Fiscal Analysis.
"We need to take immediate action to reduce spending between now and June 30 to reduce our current-year deficit as much as possible to prevent the need to borrow to meet expenses. We also need to develop new, additional approaches to further reduce spending in order to balance the budget for the years ahead,'' said Ben Barnes, Malloy's budget director. "Our budget, which already demanded painful choices, has just become about $600 million worse in FY18 and $864 million worse in FY19. We cannot afford business as usual."
Despite ever-growing budget deficits, Malloy said Monday that he believes the state's budget can be balanced in the current fiscal year without borrowing.
"No. There's no intention to borrow,'' Malloy said at the Capitol. "We're pretty good at clipping expenses."
Legislators say that cutting expenses will be difficult because there are only two months left in the fiscal year and much of the money has been either allocated or spent. If an employee was laid off, for example, the savings would only cover the final two months of the fiscal year — rather than the larger savings of a full year's salary.
The revenue numbers show the income tax paid by Connecticut's top 100 taxpayers this year fell by an astounding 45 percent compared to last year, officials said.
Republicans say a key reason for the sharp drop is that millionaires and billionaires have been moving out of Connecticut for tax reasons in recent years, including several Greenwich billionaires.
"For the past six years, Republicans have sounded the alarm,'' they said. "What we have to do now is change the state's failing policies. Tomorrow the work begins."
Members of the Connecticut Hedge Fund Association recently testified to the legislature's finance committee that high-profile, Greenwich fund managers Edward Lampert and Paul Tudor Jones have moved their operations out of Connecticut to Florida for tax reasons. Lampert and Jones are two of the best-known managers in the investment business.
House Republican Leader Themis Klarides of Derby said a few departures at the highest levels can have a disproportionate impact.
"All it takes is a couple,'' Klarides said. "Everybody isn't leaving. We're all here. But it doesn't take that many — when you're relying on high earners to that extent. ... It matters if a couple of people leave.''
She said the problems were also related to the two largest tax increases in state history in 2011 and 2015. She described the income tax numbers as "an amazing, amazing report.''
Malloy told reporters that he opposes a bill proposed in the Democratic-controlled finance committee to place a 19 percent surcharge on the hedge fund industry in an attempt to raise additional tax revenue. Connecticut has the third largest concentration of hedge funds in the world after New York and London.
"The mere discussion of it in our state ... is disruptive to commerce and people's thinking,'' Malloy said. "What I would caution members of the legislature, when it comes to these industries, is to be careful about what you're saying about them. This is an important industry that produces a tremendous amount of revenue to our state. If you lightly throw around an idea that you're going to impose a 19.5 percent tax on an industry that is responsible for a disproportionate amount of our state personal income tax revenue, then don't be surprised that people start to explore other opportunities. We should stop that kind of discussion, quite frankly.''
With the collapse in the numbers, officials now believe the state will collect less than $9 billion in the income tax for the current fiscal year. That is $450 million lower than the projection in January and more than $530 million below the estimate made one year ago — on April 29, 2016.
For the 2018 fiscal year, the projection is now $9.096 billion for the income tax — more than $800 million below the estimate made only one year ago.
While the income tax fell sharply, many other taxes were relatively steady. The cigarette tax is expected to generate $376 million in the current fiscal year, up $5 million from the projection three months ago.
Slot-machine revenues from Mohegan Sun and Foxwoods are expected to generate $267 million this year — the same estimate that was made in January. The number is expected to be flat in the next fiscal year at $267.3 million before falling to $199 million when the new MGM casino opens next year in Springfield, only several miles across the Connecticut border off I-91.
In another development Monday, Senate Democrats called for holding budget negotiations open to the press.
The change would mark a major turnaround compared to the past 25 years — when Govs. Lowell P. Weicker, John G. Rowland, M. Jodi Rell and Malloy all held key budget negotiations behind closed doors.
Looney and his colleagues will discuss the idea with Malloy during a meeting Tuesday afternoon with other legislative leaders.