Governor Dannel P. Malloy today announced that collections of estimated personal income taxes in December and January will exceed the administration’s projection by more than $900 million. The payments include normal estimated payments, one-time payments based on repatriation of foreign profits in advance of a December 31, 2017 federal deadline, and accelerated payments that would normally have been received later in January or in April 2018 in order to avoid the new federal cap on state and local tax deductions that began on January 1.
Section 704 of the bipartisan state budget, referred to as the “volatility cap” provision, requires that any revenue from estimated and final income tax payments in excess of $3.15 billion be diverted to the budget reserve fund. The November consensus revenue projection for these payments was $3.14 billion, of which more than $2 billion has been collected to date. This means that only $10 million of any increased collections can offset any budget deficit in FY 2018, while the rest will be transferred into the rainy day fund under this new law.
“This is very promising news for the state,” Governor Malloy said. “And while I have been critical of many parts of the bipartisan budget, the legislature deserves praise for implementing the new volatility cap. Because of this new law, we know that any unexpected revenue will be set aside to meet future needs in a responsible way. We still need to take steps to close the deficit this year and to avoid one in the year that starts in July. 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.”
An unexpectedly large amount of the tax revenues are attributable to one-time payments required under Section 457A of the Internal Revenue Code, a federal law enacted in October 2008 to require hedge fund managers to bring overseas profits back into the United States by the end of 2017.
In addition, hundreds of millions worth of the increased collections are attributable to taxpayer efforts to accelerate tax payments that would normally be paid early in 2018 into calendar year 2017 in order to take advantage of the federal tax deduction that became capped on January 1, 2018. It will not be possible to provide a breakdown of tax collections among these types until final tax payments in April have been received and evaluated. The State of Connecticut in recent years has collected about $750 million in December and January combined, and well over $1 billion in April.