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Lamont Should Ignore His Budget Officials

The last time the stock market plunged as drastically as it did last year was 2008. Afterward in 2009, federal income tax collections from non-withheld (non-wage) income, mostly investment income from the 2008 stock market, plummeted 31%.

After last year’s stock market plunge, Connecticut budget officials are forecasting only a 15% decline, according to the new Consensus Revenue Forecast.

If past is prologue Connecticut should experience at least a 30% decline. That would put tax revenue $1 billion below the just-released new Forecast, wiping out a large chunk of the newly projected $3.1 billion budget surplus for fiscal 2023 (combining the Volatility Cap Deposit and the Projected Operating Surplus).

Yet, no one will know until April, when almost half of all such revenue arrives, following good years in the stock market, bad years and flat years. In the months beforehand, little non-withheld income tax revenue is ever received.  

This is not just a green-eyeshade issue. In about two weeks, Governor Lamont will release his budget for the next biennium. If based upon the Consensus Forecast, it will be based upon a highly uncertain foundation, given that non-withheld income taxes are a huge percentage of revenue, accounting for $6.6 billion, or 26% of revenue in fiscal 2022.  

In all probability, the whole budget process will have to undergo massive – and confusing – revisions as a result of the likely overestimation of this revenue source. Lamont should ignore his budget officials and base his budget proposal on more conservative numbers.

On January 18th, the Consensus Revenue Forecast reaffirmed the original projection set last April and May of $5.5 billion of tax revenue in fiscal 2023 from Estimates and Finals (E&F) and the Pass-Through Entity Tax (PET), otherwise known as non-withheld individual income taxes.

How can the 2022 stock market, which plunged 20% as measured by the S&P Index, generate 85% of the revenue that derived from the gangbusters 2021 stock market with its eye-popping 27% gain in the S&P?

The most similar period prior to the 2022 – 2023 experience is the 2008 – 2009 period. In 2008, the S& P Index fell 38%, after two essentially flat years in 2006 and 2007. As a consequence of the 2008 plunge, the U.S. Treasury Department collected only $312 billion of non-withheld individual income tax revenue in federal fiscal year 2009, down 31% from $455 billion in the prior federal fiscal year, according to the Final Monthly Treasury Statement in September 2009.

Related Content: Falling Markets Will Crush Government Budgets – May 2022

So why aren’t state budget officials reducing their projection of this revenue? The reason is that virtually all of federal and state non-withheld individual income tax revenue (E&F and PET revenue in Connecticut) arrives – or doesn’t – in April every year, or three months from now. 

The federal fiscal year runs from October through the following September, while Connecticut’s fiscal year runs from July through the following June. But that doesn’t matter, because April falls in the middle of both.

Looking at federal data from Monthly Treasury Reports provides the best evidence of the not-surprising importance of April. In the federal fiscal year of 2022 ending on September 30, 2022, collections of non-withheld individual income taxes by the U.S. Treasury for the first six months of the federal fiscal year (October 2021 through March 2022) were $262 billion. Then – boom – $515 billion arrived in April, accounting for 45% of the total $1.15 trillion received in fiscal 2022. Only 23% arrived before April.

Federal data shows that this pattern also occurs following years in which the stock market declines drastically.

In the federal fiscal year of 2009, collections of non-withheld individual income taxes by the U.S. Treasury were only $94 billion in October 2008 through March 2009. Then, in April, $131 billion flowed in, accounting for 42% of the total for federal year fiscal of 2009. Only 30% arrived before April.

The fact is that there is little difference between receipts before April, no matter whether the stock market the prior year has gone up, down or sideways.

The import is that budget officials should not waste time tracking the numbers before April. They should make a broad judgment. If the stock market was up for the prior year, they should expect robust revenue; if it was down, a significant decline should be expected.

The federal numbers are indicative of the results for any state, since investors nationwide participate in the same stock market. Yet, Connecticut is a small state where a big investor could skew the numbers. There is no way for outsiders to know, since Connecticut no longer releases monthly revenue receipts on a timely basis.

When $5.5 billion of non-withheld revenue was forecast originally in April and May of 2022 there may have been the excuse that a stock market rebound was possible before December 31st. There is no such excuse now in January.


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