Malloy: Withholding snafu has no impact on state budget
Since Gov. Dannel P. Malloy laid out reasons for an unexpected gap in Connecticut revenue that surfaced in January, some wondered whether his administration is withholding something else related to state finances.
Literally.
Shortly into an accelerated withholding schedule last year installed in the wake of income tax increases, Connecticut”™s Department of Revenue Services (DRS) revealed that companies were withholding far too much income for tax bills due in 2011.
With bonuses complicating the amounts companies withheld approaching year end, some wonder if the state is on the cusp of having to return more money than it expected to taxpayers this spring ”“ perhaps much more.
Contacted at press deadline, a Malloy spokesperson said the withholding snafu has had no impact on the state”™s budget.
“We didn”™t see anything on that front,” said Andrew Doba, director of communications in Malloy”™s office.
Doba reiterated instead the administration”™s central theory laid out in a press release: The state Office of Policy and Management (OPM) thinks high-income earners may have shifted capital gains and income last year as a result of uncertainty surrounding the extension of the Bush-era tax cuts, with bonus declines in the financial service industry also a contributing factor.
Connecticut has historically made budgetary course corrections based on early returns from income, sales and property taxes, according to Joe McGee, vice president of public policy for the Business Council of Fairfield County in Stamford. He said he did not know how any withholding glitches would affect the budget, but said the income-tax implications of bonuses are very real in Connecticut.
“It”™s a very big deal,” McGee said. “Estimating that, for OPM, is not always easy. That is one of the tough things to judge.”
In January, Moody”™s downgraded its outlook on Connecticut bonds, prompting a public protest from OPM Secretary Ben Barnes who in a prepared statement lambasted the rating agency”™s “historic lack of credibility” and suggested some kind of dirty tricks at play, even as Malloy readied to attend the highbrow Davos Economic Summit in Switzerland.
Malloy separately introduced a new schedule for funding the state”™s pension liabilities, with Connecticut facing a multibillion-dollar balloon payment years down the line as currently structured.
“Today, we have a structurally balanced budget,” Barnes stated. “(We) have converted to GAAP; have fully funded our current pension obligations and seen their funding ratio rise; have negotiated significant pension benefit concessions from organized labor; have negotiated significant employee contributions to retiree health benefits; and have begun to add jobs to the state economy.”
If pending tax withholding returns played no part in the shortfall, they nevertheless caused major headaches among private and public sector organizations alike, whose workers found themselves with unexpectedly smaller paychecks starting in August when tax increases kicked in retroactive to January, prompting the accelerated withholding. On multiple occasions since, DRS has prompted companies to review the amounts they were withholding.
“This was a very unusual problem they had to deal with,” said David Lewis, CEO of OperationsInc, a human resources consultancy based in Stamford. “To have to go in and make those kinds of adjustments, and make all the ”˜what ifs”™ ”“ that”™s hard to do.
“It has now returned to normal, or it should, in the (payroll) cycle that ran (in January),” he said.
While some feared Malloy”™s tax increases might drive off wealthy residents to establish residency in other locales ”“ namely Florida or New York where they might have a second home ”“ with the tax increases just a year into effect, it seems unlikely such a large number would pack their bags, figuratively or literally, so quickly.
If nothing else, entering a second year of the Malloy administration, businesses are looking at the bottom line.
“Look, we look at budgets ”“ every line item gets scrutinized,” said Pat Cummings, CEO of Market Management Analytics in Wilton. “We are expanding a major office into Chicago, we have an office in New York. In these times we attack cost, we attack revenue, we attack efficiencies as it relates to cost and revenue ”¦ We”™re still in Connecticut.”