With the roaring stock market in overdrive and Wall Street riding the second longest bull run in American history, why isn’t more of the money coming into Connecticut’s tax coffers?
The skyrocketing Dow Jones Industrial Average has broken the all-time record 70 times this year, but despite the bulging portfolios, Connecticut’s budget deficit has only grown to $222.5 million.
State officials say there are multiple reasons why tax revenue isn’t also increasing, including the loss of numerous high-paying financial jobs at major financial firms like UBS and RBS in Stamford and the departure of some wealthy investors who have moved out of state.
And with many investors sitting on their stock gains and not cashing out, the state’s chief tax collector, former Lt. Gov. Kevin B. Sullivan, is not optimistic that the state will be collecting huge amounts of capital gains taxes through the personal income tax any time soon.
“If people were cashing out, we would be seeing the capital gains in large amounts,’’ he said. “We haven’t seen it so far.’’
Sullivan is not predicting a big jump in the Jan. 15 payments that are made by investors who pay their taxes quarterly. But could it get better by the April 15 tax deadline? He’s not ruling it out if investors cash in their gains in early 2018.
While Republicans have cheered the tax package passed by Congress on party-line votes and signed into law by President Donald Trump, Connecticut officials still do not know exactly how investors will react when the tax changes take effect in the new year.
“We are uncertain of the revenue impact of taxpayer behavioral responses to pending modifications of federal tax law, which could have a material effect on the timing and amounts collected this fiscal year,’’ state budget director Ben Barnes wrote in a letter to the state comptroller on the latest budget figures.
Senate Republican Leader Len Fasano of North Haven agrees with Sullivan that he is not expecting an influx of money to solve the state’s long-running budget problems.
“The stock market is appreciating at a value greater than land in Connecticut and greater than what you can get in a bank account, so there’s no real incentive to pull out of the market,’’ Fasano said. “I think people believe a correction of 5 to 10 percent is coming, but not right away.’’
Fasano, Sullivan and others say that part of the problem is the departure of wealthy investors who contribute a disproportionate amount to the state’s tax base.
In a trend that has continued in recent years, the state’s top taxpayers have been contributing less than in the past. The legislature’s nonpartisan fiscal office reported that the state’s top 50 highest individual taxpayers had $2.9 billion less in combined income in 2015 – meaning that they earned an average of $60 million less per tax filer. As a result, they paid $217 million less in state taxes – helping to exacerbate the state’s budget problems.
“I think it’s been a huge impact, and I think we’re going to feel more of it’’ in the new year, Fasano said. “If you lose a couple of big hitters, it’s a significant problem.’’
Officials say the trend of retirees moving to Florida and other southern states has accelerated in recent years – to include high-priced investors who are still in their prime earning years. As a result, some are still earning huge sums and paying millions in state income tax.
The U.S. Census Bureau recently reported that more than 22,000 state residents left for other states last year. A continuing influx of immigrants, many of them with a college education, enabled the state to add about 500 to its overall population of 3.5 million.
Those who have moved to Florida include major Greenwich investors like Thomas Peterffy, Edward Lampert, C. Dean Metropoulos, Paul Tudor Jones and Barry Sternlicht, according to public accounts and statements by fellow Greenwich residents. They have been joined by multimillionaires who are approaching the level of billionaires.
A positive trend from the new tax bill, Fasano said, is that some corporations will be more likely to use their tax cuts to increase dividends for stockholders. Those dividends are taxable and could end up in Connecticut coffers, he said.
New consensus revenue estimates are expected to be released in mid-January, giving legislators a more clear picture of the state’s revenue picture. Those numbers will also include the updated sales tax receipts from the busy Christmas shopping season.
Greenwich business entrepreneur Ned Lamont, a Democrat who is considering running for governor, served for four years as chairman of the Investment Advisory Council that oversees the investments of the Connecticut state pension fund. He cited the loss of high-paying, high-bonus jobs in recent years.“The bonuses and money coming out of Wall Street are not what they were a decade ago,” Lamont said. “People are leaving, and they are in big-income brackets.’’
Longtime economist Donald Klepper-Smith said the state’s budget problems go far beyond Wall Street because Connecticut’s job growth has been stagnant and lags far behind all other states in New England. With fewer people working, fewer are paying taxes and the deficit deepens.
“While we have a booming stock market, you can’t get traction in the local housing market,’’ said Klepper-Smith, adding that some home prices are down 15 percent from their peak. “We’re not creating jobs in Connecticut. You’re not creating income. It’s not just the stock market.’’
A former chairman of the council of economic advisers under Gov. M. Jodi Rell, Klepper-Smith said Connecticut has regained only 73 percent of the peak number of jobs in March 2008. The economic realities and the yearlong battle that postponed the enactment of the current state budget for weeks have not helped, he said.
“We’re an out-migration state,’’ Klepper-Smith said. “We’re losing business to other states because the business atmosphere is less than desirable. With all this budget mess, it is not desirable.’’
At the same time, the spillover effects from the soaring stock market are expected to help with retail sales as consumer confidence at the national level is the highest in 17 years.
“For every dollar you gain in the stock market, you will go out and spend a nickel in the near-term economy,’’ said Klepper-Smith, citing economic data. “Because of the stock market, we are going to see one of the best holiday shopping seasons on record.’’
Darien millionaire David DeLucia, a former high-level executive at Goldman Sachs and other major Wall Street firms, said the long-running upward momentum of the stock market has discouraged many investors from cashing out and creating capital gains taxes that would go to the state coffers.
“Right now, there’s no incentive to sell,’’ said DeLucia. “Every day or week that they wait, the market goes higher. The old saying is the trend is your friend. Every time people have sold, they’ve left money on the table. With the rising market, it has paid for people to sit and wait. It’s been great for the buy-and-hold investor.’’
With low unemployment and consumer confidence at sky-high levels, DeLucia said the psychology has been against selling stocks.
“Anybody who spent any time in the markets knows that you ride the trend, especially if you’re long and it’s going up,’’ DeLucia said, referring to long-term investors. “Right now, there has been so many times that people have been waiting for a correction, and it has never come. People are saying this is unbelievable and it’s another record and I’m making money. The psychology is very positive. If you think the economy is doing well, you’re not going to sell your stocks.’’
Subscribe and listen to the Capitol Watch Podcast