In 1991, the state of Connecticut underwent a massive restructuring of its revenue stream, the cornerstone of which was the introduction of a personal income tax. The sales tax rate was dropped from 8% to 6% and the corporate tax rate from 13.8% to 11.5%. As part of the same reform package, the state instituted a rainy day fund (the Budget Reserve Fund) with a size set at 5% of net General Fund appropriations, and also enacted a statutory spending cap, which was reinforced by a constitutional expenditure cap when approved by the electorate in November 1992. The constitutional cap requires a balanced budget and limits appropriations in all state funds to the growth in the consumer price index for the most recent 12 months or the five-year average growth in personal income, whichever is greater. The 1991 legislature also revised the debt limit statute. The current law limits authorized plus outstanding bonds payable from the general fund to not more than 1.6 times estimated general fund net tax revenues.
By the close of 1995/96, which finished with a surplus in excess of $160 million, the state had experienced five consecutive year-end surpluses, allowing it to set aside roughly $240,000 in its Budget Reserve Fund. In 1995, the legislature began a series of tax reductions. By 2002, the Budget Reserve Fund contained nearly $600 million. Individual income taxes were reduced by the addition of a second, lower (3%), bracket, to Connecticut's income tax schedule applicable to the first $10,000 of taxable income. A seven-year phase out of the state's inheritance tax rate was scheduled (although in the budget crisis that began with revenue shortfalls in 2001/02 the final phase-out was extended to 2005), and the corporate income tax was slated for reduction to 7.5% by 2000.
The state budget is prepared biennially by the Budget and Financial Management Division of the Office of Policy and Management and submitted by the governor to the General Assembly for consideration. In odd-numbered years, the governor transmits a budget document setting forth his financial program for the ensuing biennium with a separate budget for each of the two fiscal years in the biennium. In the even-numbered years, the governor transmits a report on the status of the budget enacted in the previous year and recommendations for adjustments and revisions. The budgets are submitted to the legislature in February, and the legislature is supposed to adopt a biennium budget in May or June before the beginning of the fiscal year 1 July. In 2003, the Democrat-controlled legislature adopted two budgets that were vetoed by Republican governor, the second veto coming on 13 June 2003. For the first time since 1991, Connecticut entered the new fiscal year without an enacted budget. Throughout July, the governor issued one-week and two-week executive orders calling for the continued funding of essential state services, but on 29 July 2003, the governor issued a 48-week executive order.
Tax revenues in Connecticut, the wealthiest state in the country, were affected by the collapse of the stock market that began in 2001 as capital gains earnings plummeted. The constitution requires that the legislature adopt, and that the governor sign, a balanced budget, but this could not prevent a deficit of more than $800 million in 2001/02 as revenue fell 9.5%. To be able to pass a balanced budget in 2001/03, the legislature emptied the Budget Reserve Fund (an automatic transfer of $594.7 million); cut $92.9 million from the enacted 2001/02 budget; raised cigarette taxes (from $0.50 to $1.11 per pack) and diesel fuel taxes; deferred or eliminated a number of increased exemptions, tax credits and tax holidays; extended the phase-out of gift taxes and of taxes on computer and data-processing services; and issued short-term five year notes to cover the rest of the gap. In 2002/03 strategies to reduce the budget gap entailed across-the-board percentage cuts; reduced local aid; a one-year, 10% surcharge on corporate profits; fee increases; personnel layoffs and early retirements; and program reorganizations. Over $192 million in expenditure cuts were made after the budget was enacted. A 6% tax on newspaper sales was imposed on 1 April 2003, only to be repealed in the budget passed in August 2003. More significantly, the personal income tax rates were raised in April 2003 (to 3.5% from 3% and 5% from $0.5%) effective for the 2003 tax year. The deficit in 2002/ 03 reached $495.5 million (4.1%of the state budget), and was projected at $1–1.2 billion (8.6% to 10.3% of the state budget) for 2003/04. Deficit-reduction measures enacted in 2003, besides the income tax increase, included a reduction in the maximum property tax credit for homeowners; elimination of cash payments to single adults on general assistance; an extension of the surcharge on corporate profits; and a contingent six-month reinstatement of the inheritance tax on estates valued at over $1 million should the state not receive an anticipated $250 million in federal funds in 2004.
The governor's budget for 2003/04 proposed General Fund appropriations totaling $12.477 billion, with 29.6% for human services; 21.9% for education; 9.7% for health care and hospitals; 8.5% for government operations and regulation; and 0.6% for conservation and development. Over one-fifth (20.5%) was appropriated for a "nonfunctional" category that included debt service (9.4%), employee fringe benefits, and other miscellaneous accounts. In the governor's recommended appropriations for 2004/05 totaling over $13 billion, debt servicing increased to 10.2%, with the nonfunctional category as a whole increasing to 21.9%. Under the functional categories, 29.3% is allocated to human services, 21.2% to education, 9.6% to health and hospitals, 9.1% to corrections, 8.3% to government operations and regulation, and 0.6% to conservation and development.
The following table from the US Census Bureau contains information on revenues, expenditures, indebtedness, and cash/securities for 2001.
|Population (thousands, 2001)||3,435||(X)||(X)|
|Liquor store revenue||–||–||–|
|Insurance trust revenue||1,443,963||8.13||420.37|
|Exhibit: Salaries and wages||3,081,329||16.94||897.04|
|Parks and recreation||119,578||0.66||34.81|
|Interest on general debt||1,106,324||6.08||322.07|
|Other and unallocable||3,003,246||16.51||874.31|
|Liquor store expenditure||–||–||–|
|Insurance trust expenditure||1,848,567||10.16||538.16|
|Debt at end of fiscal year||19,027,060||100.00||5,539.17|
|Cash and security holdings||29,311,523||100.00||8,533.19|