Connecticut officials forecast budget surplus this year after earlier predictions of $2B deficit; Wall Street records boost tax revenue

In a stunning turnaround, state budget officials predicted Friday that Connecticut will end the fiscal year with a small surplus — despite financial problems related to the ongoing COVID-19 pandemic.

The numbers are sharply different from only months ago when the same officials were predicting a large deficit of $2 billion due to shutdowns and high unemployment from the pandemic. The most recent estimate had sliced the deficit to $640 million.

But as Wall Street consistently broke records in 2020, the short-term budget deficit is now wiped out, officials said. The latest prediction is for a surplus of $70 million for the fiscal year that ends on June 30.

House Speaker Matt Ritter of Hartford had predicted this week that the numbers would be looking better.

“This is incredibly positive news,” Ritter said Friday. “Mid-year consensus revenues are certainly not the final numbers upon which we craft a budget, but this is an important snapshot of where the state is heading. I also expect these numbers to improve even more as the full impact of the federal stimulus bill and any future federal stimulus bills are felt here in Connecticut.”

Ritter noted that income tax and sales tax revenues are now growing at 5% for the first time in more than 10 years - a high number in a state that has been known for sluggish job growth in recent decades.

The state is now showing strength in multiple tax categories. Officials expect an additional $235 million over recent estimates for withholding for the personal income tax - meaning that rank-and-file workers who receive paychecks are contributing more to state coffers. With more workers back on the job, the sales tax projections are up by $286 million as shoppers have increased spending. For the full fiscal year, the state now expects to collect $4.5 billion in sales taxes.

One of the biggest factors was that Wall Street exploded with profits in 2020, ending the year at record highs and generating the strongest performance in years.

The Dow Jones Industrial Average had its best year since 2017 as the average closed up by 22%. The broader index of the S&P 500, which many analysts believe is a better indicator of the market’s overall performance, was up by nearly 29% in its best performance since 2013.

The technology-heavy Nasdaq composite index spiked by 35 percent in its best year in six years.

The sky-high jump in stock prices leads to major capital gains for millionaires and billionaires who are largely in Fairfield County, and they pay increased taxes under the personal income tax.

With increased revenue, the state is now allowed to borrow more money under the law as the revenues and bonding are linked.

“Interest rates are at historic lows,’' Ritter said. “During a pandemic, where unemployment numbers are high; it makes sense to bond for infrastructure improvements and help people get back to work.”

The joint estimates were made by the legislature’s nonpartisan fiscal office and Gov. Ned Lamont’s budget office. They said that the state’s rainy day fund for fiscal emergencies is expected to increase to $3.4 billion later this year.

“It’s incredibly encouraging to see that despite the challenging times we’re living in, Connecticut’s fiscal outlook appears to be getting stronger,” said Rep. Sean Scanlon, the new co-chairman of the tax-writing committee. “At a time when other states are seeing ballooning deficits, our projections are going in the opposite direction, our rainy day fund is at the highest level it’s ever been in history and consumer confidence and spending is up.’'

He added, “Make no mistake: we are not out of the woods yet, and we still face big challenges, but today’s news is a very welcome step in the direction of progress when it comes to Connecticut’s economic recovery from the COVID-19 pandemic.”

The numbers are much better than the once-feared $2 billion hole from the pandemic.

The numbers will be used by Lamont to craft his budget, and the final budget will not be decided likely until the end of the legislative session in early June.

Christopher Keating can be reached at ckeating@courant.com.