Hedge Funds Help Produce Surprise $900 Million Tax Bonus for Connecticut

By Heather Gillers Features Dow Jones Newswires

Some big tax checks from Wall Street are providing Connecticut with a surprise bounty that the state will set aside for future fiscal emergencies.

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Connecticut's collection of personal income taxes in December and January will exceed projections by $900 million, according to a statement Monday from Governor Dannel Malloy.

An "unexpectedly large amount" of that revenue is from hedge-fund managers who were forced to pay taxes on accumulated offshore gains, the governor's office said. A 2008 federal law gave managers a decade to pay taxes on those gains. Connecticut is home to many of the nation's largest hedge funds.

"This is very promising news for the state," Mr. Malloy said.

Connecticut, despite being home to some of the nation's wealthiest people, has struggled with mounting pension obligations, debt and budget deficits. Last year the state went months without a budget before passing a package that included a last-minute cash bailout for the city of Hartford, which had threatened to declare bankruptcy.

The state can use only $10 million of the $900 million to fill a budget deficit for the current fiscal year. A legal provision embedded in the budget requires the remaining money to be socked away in a rainy-day fund, Mr. Malloy's office said.

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"We need to take steps to close the deficit this year and to avoid one in the year that starts in July," Mr. Malloy said. "If we take those steps and use these one-time revenues to rebuild our rainy-day fund, we will give Connecticut residents and businesses the fiscal responsibility they have been demanding."

The $900 million bonus wasn't generated entirely by hedge funds and their offshore gains. Connecticut also benefited from an effort by taxpayers to prepay taxes during the 2017 calendar year as a way of mitigating changes made by a new tax law passed in December. The new legislation caps the amount that can be deducted for state and local taxes.

Those prepayments accounted for "hundreds of millions" collected by the state earlier than expected, according to the statement from the governor.

Write to Heather Gillers at heather.gillers@wsj.com

(END) Dow Jones Newswires

January 08, 2018 17:26 ET (22:26 GMT)