Plummeting state income tax collections are experiencing their worst decline since the last recession, falling $450 million below anticipated levels for April — one-and-a-half times the free fall projected just one day ago.
More importantly, the escalating erosion means income tax projections for the next two fiscal years must be downgraded by $500 million and $600 million, respectively, Gov. Dannel P. Malloy’s administration said Thursday.
That adds $1.1 billion to an already daunting $3.6 billion deficit forecast, all but shattering hopes of avoiding tax increases or big municipal aid reductions in the next budget.
Malloy’s administration, which already has scheduled a meeting Monday with legislative leaders to tackle the income tax problem, ordered an Executive Branch hiring freeze and warned department heads by memo to brace for layoffs.
“The drop in income tax revenue that we have experienced this April creates some major challenges for state government,” said Office of Policy and Management Secretary Ben Barnes, Malloy’s budget director. “First, we need to take every action available to us to reduce spending between now and June 30 to reduce our current year deficit as much as possible. We are doing this now. Second, we need to develop new approaches to further reduce spending in order to balance the budget for the years ahead. Our budget, which already demanded painful choices, has just become $500 million worse. We cannot afford to stay on our current course.”
State officials were stunned Monday when they learned income tax collections were running $267 million below anticipated levels for April. By Wednesday, the erosion had appeared to stabilize at $293 million.
But that was just a tune-up for the problem the administration reported Thursday.
The governor’s budget office indicated that tax collections for April now are running 30 percent below anticipated levels. And the bulk of that shortfall stems not from paycheck withholding, but from quarterly income tax returns — the chief means of reporting capital gains, dividends and other investment-related earnings.
Long recognized as the most volatile component of the income tax, capital gains and dividends traditionally drop sharply, pulling overall income tax receipts down with them, during economic slumps.
But total income tax receipts now are expected to finish this fiscal year, which ends June 30, at just under $9 billion, down from $9.43 billion last fiscal year, a loss of 4.7 percent.
That marks the first time income tax revenues decline from the prior year since 2009, though Connecticut did order tax hikes that took effect in 2010, 2012 and 2016.