Tax Expenditures A.K.A Tax Exemptions Debated
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.