The recent projection of a $260 million state budget surplus for fiscal 2008 seems like pretty good news considering the overall economic picture and forecast. I don’t think a modest surplus is at all surprising given the typical time lapse between trends in big economic drivers–like home construction and sales, the mortgage industry and the stock market–and the impact those situations have on government revenue streams.

Despite a poor last quarter, for example, 2007 was an up year for stocks. If this year’s early market decline worsens and continues through year’s end, the impact on state and federal income tax revenues will be far greater in 2009 and beyond depending on the duration of the economic slump. Also it takes time for local property tax bases to reflect less construction and declining property values. I look for this to become more evident and begin pressuring property tax revenues in 2009 or 2010.

Conversely, sales tax revenues track reduced housing prices and sales of other goods more closely. If economic conditions dictate reduced consumer spending, particularly on big ticket items, state revenue will suffer throughout the period of decline or stagnation.

Sales tax revenues aside, the delayed impact on other revenues, and the fact that the base state budget for the second year of the 2007-09 biennium is in place, suggest to me a pretty stable 2008 budget session—no big ups certainly, but no big downs either. I would expect the state to be facing more severe fiscal issues in the next biennial budget cycle, 2009-2011.

How this shows up in the Governor’s 2008 budget proposal will be known next week, although recent news stories in the Hartford Courant and Journal Inquirer give some idea of what to expect.

Legislative leaders on both sides of the aisle have expressed interest in a 2008 tax relief package funded by the projected surplus. Joint support expressed to date for such a proposal, although not on its exact components, places it at the top of a very short list of possible new spending items.

One thing that has not shown up in any of the recent stories is sentiment for adding to the second year allocation for the Education Cost Sharing (ECS) formula. An ECS increase of $80 million (4%) is in place for 2008-09, down from the $181 million (11%) increase last year. Read the OFA 2007-2009 Budget Analysis here.

Finally, and the subject my next posting, the Governor’s reintroduction of a local property tax cap promises to draw significant debate as the legislative session unfolds.