April 20, 2018

Hospital tax could complicate CT deficit, but income tax receipts keep rising

Some days bring good news and bad news.

While Connecticut learned Friday that surging state income tax receipts now are running $1.03 billion more than anticipated — $116 million better than Thursday's forecast — Gov. Dannel P. Malloy disclosed the state has a pretty hefty accounting problem equal to about $150 million.

Technically, the current state deficit has nearly doubled, growing from $198 million to $363.5 million.

But most of that problem — about $150 million — simply involves federal funding Connecticut originally expected to receive before June 30, and now expects to get sometime after June 30.

That's because the state has learned that federal health care officials are unlikely to make a final decision about a new hospital taxing arrangement until after the fiscal year has closed. And Connecticut is counting on that taxing arrangement to draw huge new federal Medicaid payments into the state's coffers.

"It is unlikely that federal approvals will be obtained before the fiscal year ends," Office of Policy and Management Secretary Ben Barnes, Malloy's budget director, wrote Friday in his monthly budget report to Comptroller Kevin P. Lembo. "This will result in a shift of $150 million from FY 2018 to FY 2019, making this issue budget-neutral across the biennium.

Barnes added that, "If federal approvals are not ultimately received, these hospital payments are subject to recovery by the state, thus mitigating any potential budgetary impact."

The U.S. Centers for Medicare and Medicaid Services, commonly known as CMS, has not ruled on a series of Medicaid-related changes proposed by Connecticut after adoption of the new biennial budget in late October.

Technically the new state budget dramatically increases annual taxes on hospitals starting this fiscal year, boosting the industry's assessment from $556 million to $900 million. But at the same time, state payments back to hospitals would rise by more than $200 million per year.

The industry, which paid about $438 million more in taxes last year than it got back from the state, would watch its annual loss shrink below $230 million under this new deal.

The complicated back-and-forth arrangement of state taxes and payments back to the hospitals actually is employed by most states as a means to leverage federal aid. And the plan in the new budget would draw an estimated $150 million annually from Washington, D.C., into Connecticut's coffers.

Connecticut still got some good news Friday involving state income tax receipts tied to capital gains and other investment income

Revenues from this portion of the income tax stream came in $665 million ahead of expectations in quarterly payments made in December and January. And final payments received on or about this year's filing deadline of April 17 — after two days of analysis — raised the potential bonanza to $915 million.

On Friday, the legislature's nonpartisan Office of Fiscal Analysis bumped the numbers upward again by roughly $115 million. All totaled, that's a potential deposit of $1.03 billion into the state's emergency reserves.

Those numbers still could change significantly between now and April 30 — when analysts deliver a comprehensive revenue forecast to the General Assembly. Legislators receive daily updates on income tax receipts during the second half of April, and projections sometimes change by more than $100 million in one day alone.

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