Finance Committee Lowers But Broadens Sales Tax, Increases Income Taxes
(Updated 3 p.m.) Broadening the sales tax base, implementing a 2 percent capital gains tax, and raising the personal income tax on the state’s wealthiest residents is how the legislature’s Democratic majority would balance the two-year, $40.6 billion spending plan proposed earlier this week by the Appropriations Committee.
According to draft documents, the Finance Committee plans to increase the top personal income tax rate on individuals who make $500,000 and married couples who make $1 million a year from 6.7 percent to 6.99 percent. The increase would bring in an additional $102.4 million in 2016 and $94.7 million in 2017.
The proposal also would establish a 2 percent tax on all capital gains income for individuals who make $500,000 and married couples who make $1 million. The establishment of the tax is expected to bring in an estimated $167.6 million in 2016 and $178 million in 2017.
The bill would also lower the sales tax rate from 6.35 percent to 5.85 percent effective Oct. 1, 2015, and it would reduce the sales tax again from 5.85 percent to 5.35 percent on July 1, 2016. The state would lose $252.7 million in revenue in the first year and $702.4 million in the second year. But it makes up for those losses by broadening the sales tax base by making more services taxable.
Documents prepared for the committee show the proposal will eliminate the sales tax exemptions on several services and clothing and footwear under $50. The committee expects to gain $136.8 million in 2016 and $142.6 million in 2017 by eliminating the sales tax exemption on clothing and footwear under $50. It also limits the sales tax free week in August by lowering the qualifying amount of the exemption from $300 to $100. It expects to save $1 million from the move.
As far as the new services are concerned, the bill would for the first time tax a number of services including services provided by Certified Public Accountants, architectural firms, private engineering firms, consultants, veterinarians, dry cleaners, advertising and marketing, and dozens of other businesses.
“We think a tax on services is counterproductive,” Mark Zampino, public affairs director for the Connecticut Society of Certified Public Accountants, said Wednesday. “A large part of this would impact business-to-business services.”
Zampino said there are only three other states that tax these types of services: New Mexico, South Dakota, and Hawaii.
“Taxing business-to-business services is a bad economic idea,” Zampino said Wednesday.
He said it’s also unfair that the legislature would single out Certified Public Accounts from other business service providers, such as attorneys or tax preparers.
But that’s not the only hit the business community takes in the proposal.
The bill would keep the 20 percent corporate tax surcharge that was supposed to sunset this year. It anticipates a revenue gain of $44 million this year and $75 million next year from the tax.
It also adopts an idea prompted by progressive groups and labor unions called combined reporting, which would require big, multi-state corporations to pay taxes on the revenue they earn in Connecticut, instead of allowing it to shift it to another state with a more favorable tax rate. The committee expects to see a revenue gain of $38.3 million in the first 18 months and $23.7 million in the next 12 months from the proposal. The estimates are based on similar tax treatment of corporations in Maryland.
The committee will authorize the Connecticut Lottery Corporation to establish the game of keno in the state. The game, which was approved by the legislature in 2013 and repealed in 2014 before it could get going, would bring in $13.6 million in revenue in the first year, and $30 million in revenue in the second year of the budget.
Rep. Jeffrey Berger, who co-chairs the committee, said it would authorize keno to be offered in bars, restaurants, and the off-track betting parlors.
The proposal was panned by Republican lawmakers who questioned most of the tax increases used to close a $1.3 billion deficit in 2016 and $1.4 billion deficit in 2017. The Democratic budget proposal approved Monday by the Appropriations Committee increases spending 4.6 percent in the first year, and 3.3 percent in the second year.
Sen. L Scott Frantz, R-Greenwich said Wednesday “it’s a sad day in Connecticut when we once again have to look at increasing taxes.”
He said many of the concepts included in the package have not received a public hearing, which means lawmakers didn’t get a chance to hear from the public about how they will be impacted.
He said many will be impacted in “significantly adverse ways.”
“There may be hundreds of people who will be put out of business as a result of some of these sales taxes on businesses and industries,” Frantz said.
Frantz said introducing a capital gains tax is going to have a chilling effect on the financial services industry, private equity, and hedge funds in the state. He said it will drive a large part of the tax base away from the state, “if they haven’t already left.”
“This I see as another turning point in the state of Connecticut,” Frantz said. “We can’t afford to do this to ourselves.”
The bill raises over $1 billion in taxes in 2016 and over $700 million in tax increases in 2017.
Sen John Fonfara, co-chairman of the Finance Committee, said he doesn’t believe there’s one person on the committee who relishes the need to raise more revenue, but somebody has to support the spending side of the budget.
“But when we look at who pays the bill currently,” Fonfara said. “It shows that the lowest end cumulatively, the lowest earners below $47,000 pay a full 20 percent of all taxes, fees, etc. to run this state.” That’s “by far the greatest of any category from top to bottom.”
He said it would be great if the state didn’t have an income tax, but Connecticut’s rate is below many of its neighboring states.
He said the entire package, which was approved 27-21 in a mostly party line vote, is balanced and fair.
But Democratic Gov. Dannel P. Malloy’s administration, which will now negotiate the budget with lawmakers behind closed-doors, disagrees.
“The tax plan put out today takes a very different approach. Simply put, it asks far too much of Connecticut’s middle class and small businesses,” Devon Puglia, Malloy’s spokesman, said Wednesday after the vote. “While the Governor appreciates the work of the Finance Committee and will review its budget in full, he believes strongly that tough choices are needed today in order to ensure a brighter tomorrow for everyday Connecticut families.”
Joe Brennan, president and CEO of the Connecticut Business and Industry Association, said he struggled to come up with the words to describe the enormity of the tax package and impact it would have on all of Connecticut, not just the business community.
“It goes so far beyond business,” Brennan said. “We are going down a path that is only going to make our problems worse.”
He said the total budget, which raises taxes and reinterprets the spending cap, is not sustainable and won’t bring in the revenues the state is counting upon because businesses and people, especially those at the top end of the income scale, are mobile.
“A lot of manufacturing companies have not been investing in their operations in Connecticut and have locations elsewhere,” Brennan said.
It would be easy for businesses like that to pack up and leave, he added.