Gov. Dannel P. Malloy has recommended more than $700 million in cuts to municipal aid to help compensate for a $1.5 billion projected decline in state income tax receipts over the next two years.

The adjustments Malloy proposed Monday to the $40.6 billion, two-year budget he first unveiled on Feb. 8 also would add about $80 million in annual tax hikes to the $600 million in new yearly revenue recommended three months ago. Most of the increase comes from boosting the real estate conveyance tax, though the governor also recommended ending the sales tax exemption on nonprescription drugs and imposing certain restrictions on business tax credits.

Malloy’s plan also maintained controversial proposals to expose nonprofit hospitals’ real property to local taxation and to bill cities and towns for a portion of teachers’ pension costs — though the latter proposal was capped.

And while most communities would lose funding, Hartford would receive a $50 million increase next fiscal year — $10 million more than the level Mayor Luke Bronin said is necessary to avert bankruptcy.

The revised budget also would imposed even deeper cuts on a social services safety net that has been reduced frequently in recent years.

“The state must live within its means,” the governor said. “We cannot spend more than we take in. That’s why, when revenue came in lower than expected in April, we went back to the table to redraft our budget proposal. “This session, the best outcome we can achieve for the people of the state is to adopt a responsible, balanced budget that does not rely heavily on new or increased taxes.”

The governor’s plan still relies on $1.57 billion in savings from state employee concessions over the next two fiscal years combined. The administration, which has been involved in informal talks with unions since November, is expected to announce specific layoffs later Monday.

The governor warned unions last month that he had formally begun the process of ordering layoffs for an estimated 1,100 employees.

The Democratic and Republican caucuses in the General Assembly are expected to release separate proposals Tuesday to compensate for the eroding revenues.

Earlier this month, state analysts downgraded anticipated revenues for the next two fiscal years by $1.46 billion — nearly $600 million next fiscal year and $865 million in 2018-19 — largely because of eroding income tax receipts.

That erosion dramatically increased the projected shortfall in the next two-year budget.

The administration previously had estimated finances, unless adjusted, would run $1.7 billion in deficit in 2017-18 and $1.9 billion in in the red the year after that.

The new potential shortfalls are $2.3 billion and $2.8 billion, respectively. These represent gaps of 12 percent and 14 percent.

Cities and towns pay a steep price

Municipalities, which already sacrifice considerably under the governor’s original plan, would lose in several new categories.

A sales tax revenue-sharing plan enacted by Democratic legislators and Malloy just two years ago — despite strong evidence that state finances could not sustain the program — would lie in tatters under the governor’s latest proposals.

Communities were supposed to receive about $340 million in sales tax receipts next fiscal year and $350 million in 2018-19. The governor’s revised proposal eliminates more than 80 percent of that promise, $278 million in the first year and $285 million in the second.

The revisions also would cut $58 million per year owed municipalities in another revenue-sharing program involving video slot proceeds from the two casinos in southeastern Connecticut.

Other new proposals to cut local aid include cuts of:

• $20.7 million per year from various grants that reimburse municipalities for a portion of the local tax revenue they lose because state, private college and hospital property is exempt from municipal taxation.

• $10 million per year from the Education Cost Sharing grant to local school districts.

• $5 million per year for regional councils of government.

The governor did offer a compromise on another controversial proposal offered back in February that would cost cities and towns significantly.

To help pay for spiking contributions to the state pension fund for municipal teachers – a $1 billion expense now that will grow by more than 33 percent over the next two fiscal years combined – Malloy proposed in February to bill cities and towns for one-third of the cost.

That would have amounted to $408 million next fiscal year and $421 million in 2018-19. But legislators from both parties balked at giving municipalities such a large share of a cost expected to skyrocket over the next 15 years.

One projection from the administration has the full teachers’ pension bill topping $6.2 billion by 2032, which would have left the local share under the governor’s original proposal close to $2.1 billion that year.

The governor’s latest revisions capped the annual bill at $400 million per year.

Malloy avoids income, sales tax rate hikes

After months of insisting that Connecticut must try to close the impending, mammoth-sized deficits without relying chiefly on tax hikes, the governor asked for more revenue Monday — but avoided raising rates in the income and sales tax.

Most of the new tax revenue, $50 million next fiscal year and $52 million in 2018-19, would come by boosting the real estate conveyance levy on high-priced residential properties — sales topping $800,000 — from 1.25 to 2 percent.

The governor did recommend raising about $17 million per year by ending the sales tax exemption on nonprescription drugs.

And another $12 million would be raised annually by eliminating or capping various business tax credits.

Malloy also retained the three principal tax hikes recommended in his original budget:

• Eliminating the $200 property tax credit within the income tax, which would cost middle-income households $105 million per year.

• Reducing the income tax credit for working poor families, which would cost those filers $25 million annually.

• And boosting the cigarette tax by 45 cents per pack and raising other tobacco levies to generate an extra $60 million next fiscal year.

The governor also recommended sweeping funds from one-time or other limited revenue sources to help balance his revised proposal. This would provide about $87 million in revenue in each fiscal year.

Safety net takes another hit

Malloy would save close to $100 million next fiscal year and more than $120 million in 2018-19 with cuts assigned chiefly to the Department of Social Services, but also to programs for the developmentally disabled, mentally ill and drug addicts.

And a proposal that Connecticut’s hospitals already don’t like would get worse under the latest revisions.

Malloy proposed in February allowing cities and towns to tax nonprofit hospitals’ real property, which the administration estimated would be worth about $212 million per year to communities.

To offset that hit, though, the governor recommended about $250 million in new annual state payments to the industry. About two-thirds of that cost to Connecticut would be covered with federal Medicaid reimbursements.

But the governor’s latest plan reduces that payment back to hospitals by $35 million per year.

Cuts to parks and public safety

Malloy proposed reducing funds for the Department of Energy and Environmental Protection by $8.1 million per year from his February plan.

Much of that reduction would result in cutbacks at state fish hatcheries and a new “passive management” plan for some state parks, meaning those facilities would be overseen by minimal staff.

The governor also proposed scaling back funding for the Department of Emergency Services and Public Safety from his original plan by $4.6 million per year.

Much of that cut would mean reducing funding for nine regional fire training schools.

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