UConn Economist: There Will Be Pain!

by Hugh McQuaid | Dec 8, 2010 5:42pm Google
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Posted to: State Budget

How is it that the state spends around $5 billion each year that never shows up on executive and legislative spending reports? According to UConn Economist Arthur Wright, the money takes the form of tax exemptions, which are taxes the state could collect on goods and services, but chooses to forego for a variety of reasons.

In the University of Connecticut’s quarterly economic review, released Wednesday, Wright takes a close look at the tax exemptions, which he said are hard to define because they are dispersed throughout the tax code.

The largest chunk of exemptions are from sales and use taxes, Wright said, which make up around 56 percent of the tax expenditures. Many of these uncollected taxes are on items most people are unaccustomed to paying taxes on. For instance, the state doesn’t collect taxes on clothing purchases of under $50 or food items at the grocery store.

Wright’s report, which was based on data from the Office of Fiscal Analysis, quantifies the estimated revenue loss from these exemptions. The state loses $130 million annually on the clothing exemption and $375 million from food purchases.

But food and clothing aren’t even the largest areas of revenue loss. Untaxed sales to non-profit organizations, like the university, represent about $700 million. Sales tax for motor vehicle fuel makes up another $400 million.

While we do pay a tax when we purchase gas at the pump, Wright notes that tax is a separate “user” tax which goes, for the most part, to maintaining roads and the transportation infrastructure. The exemption on motor vehicle fuel sales tax is rationalized as being redundant, but Wright questions that logic.

“Not to add sales tax to the full cost of a gallon of motor fuel—delivered cost to the station, plus road tax—is to subsidize motor fuels compared with many other goods consumers buy,” he wrote, adding that the sales tax would mostly hit people driving “monster SUVs.”

At a release event in East Hartford for the report, Michael Riley president of Motor Transport Association of Connecticut, Inc., questioned that assertion. Riley, who represents the trucking industry, argued that a significant amount of money is already being paid for fuel, with federal gasoline tax at $.18 a gallon and one of two state gasoline taxes at $.25 a gallon. Taxes on diesel fuel are even higher, he said.

“The impression one might get from listening to the description of the $400 million in motor fuels tax is somehow that’s getting away with something that ought to be stopped by throwing a 7 percent sales tax on top of that,” he said. “It is a user fee but what’s wrong with that?”

Riley added that other forms of transportation, like passenger rail and transit programs, are also subsidized.

“Your inference is perhaps personal,” Wright said and apologized but he maintained that adding sales tax to fuel was “a slam dunk if you want to equalize the tax treatment of consumer goods.”

The exchange seemed to also prove Wright’s premise that each tax exemption benefits one interest group or another, which means each potentially has a “political defender.”

In his report, Wright suggested that a suitable motto for considering cuts to tax exemptions might be “There will be pain!”

Anticipating the question of whether closing sales tax exemptions would hurt the poor, Wright posed a different question: “If one’s goal is to help the poor, why exempt from sales tax so many goods that are bought by the non-poor?”

He suggests instead that the exemptions were put in place for the benefit of the people selling the exempted goods.

Wright also recommended reevaluating the necessity of other tax exemptions like the ones given to corporations and businesses. At $187 million, those exemptions make up a relatively small amount of lost revenue.

But Wright suggested that in looking at eliminating some of the exemptions, the state may be able to broaden the business tax base and lower its tax rate, something he said would “reduce meddling by the State of Connecticut in the business decisions of corporations.”

Joseph Brennan, senior vice president of the Connecticut Business and Industry Association, said the state legislature looks at tax exemptions and tax credits every year. He said all his organization is looking for is a fair hearing on the value of these exemptions and credits and what they mean to businesses such as manufacturing companies.

CBIA represents a lot of manufacturing companies in the state that are vital to the economy and Connecticut wouldn’t be well served to start charging a sales tax on materials or machinery used in the manufacturing process, Brennan said.

If the legislature starts talking about eliminating some of the exemptions or credits that are vital to business then CBIA will be there to defend them, he said adding that the only way out of this fiscal mess is by supporting economic growth. Eliminating some of these exemptions will stifle that growth and the savings won’t be enough to plug the estimated $3.67 billion deficit.

Tags: tax exemptions, uconn, economist, budget, CBIA

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