Connecticut's coffers are feeling the pinch of the state's super-rich no longer paying what they used to in personal income taxes.
New figures released last week show tax revenue from the state's top 100 highest-paying taxpayers declined 45 percent from 2015 to 2016. The drop adds up to a $200 million revenue loss for the state.
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"When you look at the top 75, top 50 ... this is a group of wealthy people who are dramatically less wealthy than they were before," said Kevin Sullivan, commissioner of the Connecticut Department of Revenue Services. "These folks, for a number of reasons, are either not realizing as much income or don't have as much income."
This latest drop in tax revenues paid by the wealthy, a problem for the past several years, has exacerbated Connecticut's current budget woes. The projected deficit for the new fiscal year beginning July 1 has now jumped from about $1.7 billion to $2.3 billion, while the deficit predicted for the second year of the state's two-year budget is now about $2.7 billion. The state's main spending account, the general fund, is roughly about $18 billion annually.
Lawmakers and the governor have already discussed the possibility of making deep cuts throughout state government, including to state colleges and universities and social services. Meanwhile, there's a threat of about 4,000 layoffs if a $700 million labor concession deal isn't reached with state employees. Lawmakers say these latest revenue figures make that agreement even more crucial.
Some of the revenue hit is being blamed on changes affecting hedge funds, an important industry for Connecticut. Sullivan noted how several international hedge funds have recently failed, resulting in "significant retrenchment" from investors. That drop in tolerance for risk brings smaller margins and ultimately less personal income for the state to tax, he added.
Sullivan acknowledged part of revenue decline can also be attributed to "a handful" of wealthy individuals who moved to more tax-friendly states — an issue frequently raised by legislative Republicans, who argue Connecticut's tax policies encourage the state's super-rich to move out.
In contrast with some of his fellow Democrats, Gov. Dannel P. Malloy has urged the General Assembly to steer clear of legislation that targets the state's wealthiest taxpayers, including a proposed 19.5 percent tax on hedge funds. The "mere discussion of it in our state, year after year," he said, is harmful to Connecticut's commerce and reputation.
"This is an important industry. It produces a tremendous amount of revenue to our state," he said. "If you blithely throw around the idea you're going to propose a 19.5 percent tax on an industry that is responsible for a disproportionate share of our state personal income tax revenue, then don't be surprised when people start to explore other opportunities."
New Jersey experienced such a problem in 2016 when a hedge-fund billionaire declared himself a resident of Florida. David Tepper also moved the hedge fund's official headquarters to Florida, resulting in a total estimated revenue loss of hundreds of millions of dollars to the state.
Malloy's warnings follow a 2016 report to Connecticut's Commission for Economic Competitiveness that determined the industries adding the most jobs in the state are paying an average wage of $54,018 a year. Meanwhile, industries with shrinking employment in Connecticut pay an average wage of $75,246. The same report also found Connecticut is losing young and educated people to other states.
But Malloy said he doesn't foresee Connecticut losing its status as a wealthy state any time soon. Recent census data show Connecticut still has the highest per capita income in the nation.
Malloy is optimistic about job growth in the state's aerospace and defense industries, including Electric Boat, Sikorsky Aircraft and Pratt & Whitney.
While those jobs don't produce "the extraordinary wealth" associated with hedge-fund billionaires, he said, they will supplement Connecticut's large base of well-paying jobs in advanced manufacturing, bioscience, college education and financial services support work.
But those jobs aren't expected to generate the income tax needed to help fill Connecticut's current revenue hole. Much of the anticipated employment growth is years away. For example, EB, which currently has more than 15,000 employees at its Connecticut and Rhode Island facilities, hopes to grow its employment base to 18,000 by 2030.