More Than $7B A Year In Tax Exemptions, Expenditures, & Credits
Every other year, the Office of Fiscal Analysis compiles a list of tax exemptions, expenditures, deductions, or credits that result in less tax revenue to the state. The 218-page report is given to state lawmakers.
In OFA’s most recent report, it says that for a variety of reasons the state decides not to collect more than $7 billion a year in taxes from its residents and businesses.
Some are small, such as a tax exemption on dues paid to lawn bowling clubs. That exemption costs the state about $400,000 a year in revenue. The exemption benefits fewer than 300 people. It was implemented as part of the tax package passed by the legislature in 1999.
Then there are some of the bigger items, like the property tax credit. The credit applies to single filers with incomes below $146,500 and married filers with combined incomes below $190,500. The $300 property tax credit benefits about 896,000 taxpayers and it will cost the state $213.1 million in 2014 and $214.3 million in 2015.
Before 2011, the credit applied to $500 in property taxes, but Gov. Dannel P. Malloy tired to eliminate it completely. On his 100th day in office, Malloy backed off that proposal and reduced the tax credit to $300.
Another 200,000 Connecticut residents benefit from the Earned Income Tax Credit. The incentive for working people who make too little money to pay income taxes will cost the state about $104.5 million in 2014 and $120.7 million in 2015. It was approved by the legislature in 2011 and advocates say it will help begin to lift these individuals out of poverty when combined with the federal Earned Income Tax Credit. Advocates also argue that these working poor pay a higher percentage of their wages on other taxes such as sales and gas taxes.
Fewer than 150 people will take advantage of the angel investor tax credit, according to the report. The credit is available to taxpayers who invest in start-up, technology-based businesses in Connecticut. Each credit equals 25 percent of the cash investment, up to a maximum of $250,000 in total credits for any single investor. It will cost the state $6 million in 2014 and $3 million in 2015. The tax credit was established in 2010 and expanded in 2011 as part of the special session on jobs.
The job expansion tax credit, also created during the 2011 special session on jobs, will benefit fewer than 300 people. The tax credit is for businesses that create new jobs and hire certain Connecticut residents to fill them. The credit is $500 per month, per new employee, or $900 per month if the employee meets certain criteria. The job expansion tax credit will cost the state $12 million over the next few years.
There also are various products or services for which that state exempts sales tax. For example, sales taxes are not levied on prescription drugs and certain medical devices.
Connecticut implemented its sales tax in 1947.
“Since then, the tax has evolved into a complex structure with a lengthy list of taxable goods and services, and an even lengthier list of items that are exempt,” according to the report.
The report estimates that there are approximately 1.5 million people benefiting from the sales tax exemption on prescription drugs. The measure costs the state about $320 million a year, according to the report.
Sen. Minority Leader John McKinney, who is running for governor, said he doesn’t like how some of the items in the report are defined. He said it assumes that government should be collecting $7 billion in tax revenue each year because it assumes that items that are not taxed are an expenditure by state government.
He said when people purchase food or buy prescription drugs, that’s not an “expenditure” by the government and it shouldn’t be categorized as such.
He said he would fight to keep the tax exemption in place for food and medication, but he doesn’t oppose giving consideration to getting rid of exemptions that favor one specific business, or that just don’t make sense.
There are fewer than 10 companies, according to the report, that don’t have to pay taxes on the gross earnings they garner by selling gas to a plant with three gas turbines and a total capacity of 775 megawatts used to generate electricity.
McKinney said targeted exemptions that favor one specific company should be eliminated from the tax code.
“I think it’s fair to look at some of these and ask why they got passed,” McKinney said.
In 2011, Malloy and the Democrat-controlled legislature eliminated the sales tax exemption for some products and services such as yoga classes and yarn. In 2012, Malloy issued an executive order to create a task force to further study the state’s tax exemptions and expenditures, but not much has happened since.
The task force submitted a final report to the governor on Sept. 27, 2012. The suggestions made by the task force included having the Department of Economic and Community Development administer all major tax credits available to business. It also suggested sunsetting no use and low use tax credits, and consolidating related tax credits.