Lawmakers and Gov. Dannel P. Malloy avoided increasing taxes last year when resolving a nearly $1 billion budget deficit, however, at least one advocacy group is asking them to reconsider a “cuts-only approach,” as they prepare to tackle a much larger budget deficit.
Connecticut Voices for Children is recommending that lawmakers broaden the sales tax base, reform the income and corporate tax structure, levy a tax on sugary beverages and institute a fee on corporations who don’t pay their employees a living wage. The group outlined $3 billion in tax increases in a new report.
“A cuts-only [approach] may offer a short-term solution to the budget deficit, but does so at a significant cost to the long-term economic and social structure of the state,” Derek Thomas, a fiscal policy fellow at Connecticut Voices for Children, said in the report. “There are opportunities to invest in Connecticut’s future by modernizing an outdated sales tax system, strengthening taxes on corporations, and reforming wealth and income taxes.”
The report outlines three challenges with the current tax structure.
It found that income tax collections on corporate profits in Connecticut have dropped from 13.2 percent of general fund revenue in 1991 to less than 4 percent of the overall tax collections in 2015, mainly due to the growth of tax credits or avoidance. Sales tax revenue also decreased from nearly one-third of total general fund revenue to 25.2 percent. The report argues it’s because the sales tax has failed to keep up to date with the economy in which people consume more services than goods.
The report also repeated previous conclusions that the overall state and local tax structure burdens low income taxpayers more than the wealthiest increasing the wealth disparity.
Corporate Taxes
The drop in corporate tax revenue “cannot be attributed to a decline in business profits,” according to the report. “From 1991 to 2015, national corporate profits increased by more than 400 percent, while state corporate income taxes increased by only 107 percent.”
The report attributes the decline in corporate tax revenue to the growth in business tax credits and sophisticated corporate tax avoidance.
The report points out that businesses that do not file as C-corporations pay taxes on their profits at the individual owner level––known as “pass-through” treatment––and are taxed at personal income tax rates, a lower rate than the 7.5 percent corporate income tax.
“The growth in the number of pass-through businesses (partnerships, limited liability companies, and S-corporations) relative to the growth in the number of C-corporations has contributed to the decline in corporate income tax returns and revenue,” the report concludes.
The corporate tax surcharge was supposed to sunset in 2015, but lawmakers extended it another two years. At the moment a temporary 10 percent surcharge on companies that have more than $250 in corporate tax liability and either have at least $100 million in annual gross income or file combined or unitary returns will be in place for 2018 before its phased out.
Sales Taxes
The report also concludes that by broadening the sales tax base on services could generate $1.5 billion in new revenue if the tax rate remains 6.35 percent. If it was reduced to 5.5 percent it could still generate $730 million in new revenue, according to the report.
Also applying the 6.35 percent sales tax to digital downloads such as books, movies, and music could help bring in an additional $7 to $11 million, according to figures estimated in 2011 when the state first considered the proposal.
Income
The report also advocated increasing the income tax by half a percent on Connecticut’s two top personal income tax brackets. The report says that would results in an additional $283.1 million in new revenue and could be offset by larger federal income tax deductions available to those high-income earners.
However, last year, legislative analysts told lawmakers that the top 50 Connecticut taxpayers made $2.9 billion less between 2014 and 2015. That drop in income caused the state to lose $217 million in revenue.
“A half percent, one percent or two percent increase in the top tax bracket would not have a negative impact on revenue due to migration,” the report concluded.
That’s a much different analysis than the one given by Republican lawmakers who claim outmigration of Connecticut’s wealthiest residents is directly tied to Connecticut’s tax structure.
Senate Republican President Len Fasano, R-North Haven, said Connecticut needs to make structural changes to its budget to ensure those who need services receive them before looking at the revenue side.
Asked about the report, Fasano said CT Voices for Children is an advocacy group that “picks and chooses its issues to fit its narrative. I wish they were less political.”
As for raising revenues, House Speaker Joe Aresimowicz, D-Berlin, said “We have to continue to look for ways to reduce spending, and see how revenues come in over the next few months.”
Like Malloy tax increases are not “my first choice” Aresimowicz said. “But we also shouldn’t start by taking things off the table, particularly before we see what the governor offers and the committees then begin to really delve into the numbers.”
Senate President Martin Looney, D-New Haven, said a lot will depend on the framework the governor sets when he releases his budget in February.
Looney said he would like to model this year’s budget after the one they adopted in 2011, which included spending cuts, state employee concessions, and revenue increases.
“I think we should have some combination of all three of those,” Looney said Tuesday.
Looney would also like to allow municipalities levy a half-percent sales tax that they would be able to keep—no strings attached. It would mean the sales tax could vary from town to town, but it wouldn’t put any restrictions on the town.
And he would like to move Connecticut’s estate tax more toward the federal exemption level.
He said estate planners have told him people begin planning about seven to 10 years in advance of their death and adding the exemption may encourage retirees to stay in Connecticut a little longer.
