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Tax Expenditures A.K.A Tax Exemptions Debated

by Christine Stuart | Jan 26, 2011 1:44am
(12) Comments | Commenting has expired
Posted to: State Budget

Christine Stuart photo

Sen. Minority Leader John McKinney

The debate over what to do about the more than $5 billion the state chooses not to collect from a specific group of taxpayers took center stage Tuesday at a budget conference sponsored by Connecticut Voices for Children.

Some people call them “tax exemptions.” Others on Tuesday were calling them “tax expenditures.” They were all talking about the rules the state makes to allow people not to pay taxes—when buying yarn, for instance. What you call them, it turns out, could influence how the state tackles its $3.7 billion budget deficit.

Commonly referred to as tax expenditures, Gov. Dannel P. Malloy’s administration has promised to take a hard look at them, but Republican lawmakers don’t think much of them or their ability to help solve the budget deficit.

“There is no such thing as a tax expenditure,” Sen. Minority Leader John McKinney said Tuesday. “Just because you don’t take something doesn’t mean it costs government money.”

Just because some things in our state are taxed and others are not “doesn’t mean that not taxing those things is an expenditure by state government,” said McKinney.

Others like Richard Pomp from the University of Connecticut Law School said the use of tax expenditures, rather than grants or loans, “reduces markedly the transparency and accountability of state government.”

Pomp and other like-minded advocates see tax expenditures as spending, which isn’t scrutinized and sometimes cause the state to lose an unlimited amount of revenue.

“Unlike spending programs, the potential for revenue loss is virtually unlimited in any given year,” Pomp said. “”Consequently, tax expenditures represent a policy choice by the legislature to spend unlimited amounts of money, with no oversight or evaluation.”

Fred Carstensen, an economist from the University of Connecticut, said the fact that these tax expenditures aren’t included in the spending cap, while increased federal reimbursements are included, is “idiotic.”

He said the legislature has never adopted a constitutional spending cap. He said the one crafted in the middle of the night back in 1991 in an effort to help pass the first state income tax is an emergency placeholder. He said the legislature never adopted the constitutional spending cap to amend the draft piece of legislation it’s currently living under.

“We literally sent $50 million of hospital money back to the federal government in order to stay under the spending cap,” Carstensen said. “I believe in the spending cap, but why are you including federal funds?”

Another item Carstensen and others at the CT Voices for Children budget forum wondered about was tax credits.

He said no company has ever decided to start offering childcare because of the childcare tax credit. The companies that were already doing it have been able to take advantage of it, but that means parents in low-income families that really need a subsidy don’t get it.

“Why do we offer it that way, instead of giving it to people that actually need childcare? Because it comes under the spending cap so it creates a perverse incentive to substituting tax expenditures for direct expenditures and its extraordinarily less effective and meaningful,” Carsenten said.

Asked if tax expenditures should be included under the spending cap, House Minority Leader Lawrence Cafero said “what we would like to do is live within it, which would require us to spend less money.”

The level of taxes the state has right now are sufficient and in some instances too great, McKinney said.

Many of the tax expenditures on the books are for business to business transactions and eliminating some of them may hinder job growth in the state or simply increase the cost of doing business for certain companies, Cafero said.

CT Voices for Children Executive Director Jamey Bell said tax expenditures become “de facto permanent revenue losses regardless of changed economic conditions.”

Since passage of the income tax the state has added 145 new of expanded sales and use tax exemptions at the same time the corporate income tax rate was cut from 11.5 percent to 7.5 percent for S Corporations and limited liability companies, already exempted with numerous new tax credits.

CT Voices for Children is advocating a more progressive income tax structure. Currently the wealthy in the state are taxed at 6.5 percent, while most are taxed at 5 percent.

Ben Barnes, Gov. Dannel P. Malloy’s budget director, told the crowd Tuesday that he doesn’t know exactly how the tax side of the equation is going to shake out yet. He said the staff is reviewing a phonebook size list of items and is evaluating how the spending cuts and revenue enhancements will impact services.

“It’s not just about income progressivity,” Barnes told the crowd.

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(12) Comments

posted by: CitizenCT | January 26, 2011  9:16pm

An expenditure of state Gvt is a payment or obligation to pay for goods or services on behalf of the state and its residents.  Taxes are the means to generate cash so the expenditures can be made.  CT’s problem isn’t that taxes are too low, the problem is state spending is too high.

posted by: ... | January 26, 2011  10:41pm

...

The 3% across the board sales tax seems like it would work best, but I would like to see some serious debate regarding its effectiveness.It has been said it would bring in more revenue to the state than our current sales tax policy.

The reduction is in some sectors a pro-business strategy. Just by looking at this analysis of 2009 spending: http://www.visualeconomics.com/how-the-average-us-consumer-spends-their-paycheck/ .

Under the assumption they are providing these costs before sales tax, CT residents would be spending 6,500.98 on food per year.

However, cutting the sales tax in half puts about 184 dollars back into their pocket.

Entertainment (2,700, or 2,862 with CT sales tax, becomes 2,781, providing 62 more dollars in additional potential saving).

However I am sure implementing the tax on new items may hurt untaxed businesses, and maybe some exemptions would need to stay in place if proven counterproductive.

But it seems if we want to boom economic growth for the private industry here in CT (which CT-Republicans promote as the only way to recover), then the people must be taxed less on personal spending at these businesses.

posted by: ... | January 26, 2011  10:54pm

...

I apologize I typed fast and improperly numbered my second stat. That was meant to be 81 dollars in savings.

posted by: hawkeye | January 27, 2011  11:44am

JonessAC12: I do not believe that lower income taxpayers, would agree with your contention that an across the board 3% tax increase, is equitable to them.  These people, are already hurting the most in our Great Recession, and forcing them to pay tax on a larger part of their personal budgets, in food purchases, in not fair to them, “as they are already stuck, between a rock and a hard-place!’  There is no magic wand, for equitable taxation, for all, Jonessey! Let Gov. Malloy, and the Connecticut General Assembly, tackle the probem.

JonessAC12:  I do not believe that lower income taxpayers would approve of you contention that a 3% across the board tax increase would be a good idea.  Many of these people spend a larger part of their income on food purchases, which would be taxed, in an across the board tax increase. 

posted by: hawkeye | January 27, 2011  11:53am

JonessAC12:  You portray yourself as a mathematical genius to save $81. dollars.

I give you credit Jonessey, you are always trying to justify your personal conclusions, by quoting another source for your information, even if it is not applicable to the topic.

posted by: Matt W. | January 27, 2011  4:42pm

Matt W.

Let’s give more money to the people who were not able to handle it in the first place. 

History has repeatedly shown that no matter how you parce the data, an increase in taxes results in a greater increase in spending. But I’m sure we’ve learned our lesson this time.  HAHAH!

Oh, even better: I hope they say it will be temporary!!! LOL!!!

posted by: ... | January 27, 2011  8:43pm

...

Actually hawkeye it is directly related to the topic. They discuss whether or not taxes not levied in certain areas of our economy are expenditures or exemptions by the state.

Many industries are not charged the 6% sales tax on certain items they purchase or transfer in CT. And some argue (in this article) that is not an exemption, but an expenditure by our state because we spend money to give them a break, not simply being ‘exempt’.

But I am glad as always for the praise hawkeye. And I would be glad if my family had the hundreds of dollars with the 50% cut in the sales tax to be invested or spent again in our state, rather than sent up to a bloated government.

posted by: ... | January 28, 2011  11:15am

...

And as a plus hawkeye, many lower income families who most likely use food stamp account cards, would be exempt on the 3% sales tax cut as it would create a conflict with federal/state policy (which exempts sales tax from food purchases made with a food stamp card).

All other families without this card are paying 6% right now in groceries.

I agree that altering this exemption is counterproductive and would therefore continue to be exempt by our legislature and Gov. Malloy.

posted by: hawkeye | January 28, 2011  12:08pm

CitizenCT: AGREED! Spending “is too high!”  Unfortunately, lifetime politicians, like Gov. Dannel P. Malloy, keep getting elected into office, by continuing to gain votes, “by promising to give people the moon,” and instead, we have “at least” a $3.5 billion dollar state budget deficit, and $19. billion dollars in bonding debt, for the highest per capita indebtedness in the country. 

The big city, public entitlement crowd, voted Malloy into office, expecting to get more ent itlement money, which has ben continually reaching them through our “free-spending Democratic Connecticut General Assembly, who our big city voters, also put in office.

When I lived in the South, years ago, certain residents said, “I want to move to Connecticut, as they have the best welfare plan, in the country!” Democratic leaders, led by the late John Bailey, ALWAYS encouraged and welcomed, this crowd into Connecticut, for the DEMOCRATIC VOTE!  They even gave them financial assistance to move to Connecticut. 

This is why the big cities, give the DEMOCRATS THE VOTE!  And, the state is facing bankruptcy, in the process, as the Connecticut Democratic Party, has had to spend the state, into oblivion, to retain this big city vote, that is still winning elections, for them.

posted by: ... | January 28, 2011  4:21pm

...

As a bonus hawkeye and sorry I didn’t imply this, but those who are lower income and most likely use food stamps are exempt from the sales tax on food because of state/federal law. All other citizens are not.

I would agree this aspect would be a prime example of what I called a proven ‘counterproductive’ move if it was lifted. So the reduction in sales tax regarding food would not hurt most low income families, and would help all other income levels on their grocery bills.

posted by: John in Hamden | January 30, 2011  9:33am

Some, only half humorous, old saws containing some real cautions for readers popped into my head.  Most came while reading the participants’ straining and torturing various dictionary meanings for the English/American language

The old saws were:

To economists, the real world is sometimes a special case.

How does one tell when a lawyer is lying?  His lips are moving.

Those who can do.  Those who can’t do, teach.  Those who can’t teach, “educate” teachers.  And, those who can’t do any of the above become professors and try to convince the rest of us that they are “experts” because they’ve written enough to stay inside the university womb and away from the real world of business, living, politics and survivial.

“Tax exemptions” = “tax expenditures”. 
In my opinion, this leap could only be postulated by those with employment, greed, or political power grabbing, irons in the fire and wishing to be funded more extensively. 

Or, on the other hand, there is the potential for them being complete idiots.

Or, possibly the answer on today’s News Junkie multiple choice is D. All of the above!

But, whichever is the case, I apologize for any redundancy.

posted by: hawkeye | January 30, 2011  3:44pm

JonessAC12:  I was referring to lower income taxpayers, “above the poverty line,“that would be affected, in high numbers, with the taxing of food purchases.”