State Spending and Taxes: Budget Increased, Taxes Changed
When the General Assembly adopted the next two-year state budget, lawmakers unfortunately didn’t take the steps necessary to end Connecticut’s budget deficit cycle.
The budget for fiscal years 2014 and 2015 increases spending by nearly 7.5%, which includes the $6 billion in Medicaid spending lawmakers took out from under the state’s spending cap. It also extends three business taxes that were set to expire on June 30, includes more than $500 million in one-time revenues, raids millions from other funds, and includes significant new borrowing.
The $43.9 billion budget (or, $37.6 billion by legislators’ Medicaid-less plan) also includes a major investment in science and technology at the University of Connecticut, funding for the landmark public education reforms passed in 2012, continuation of economic development programs, and aid to cities and towns.
State policymakers, going forward, need to exhibit a greater commitment to lean the cost and effectiveness of government and set priorities that make sure tax dollars are being spent on the programs that are vital, such as the education reforms adopted in 2012.
Only then will the cycle of state budget deficits end and our unfunded long-term obligations diminish—fiscal problems that concern the business community and hold back Connecticut’s economic potential.
Here is a review of modifications made this legislative session to state and municipal revenue laws. Also discussed are a few proposals mentioned earlier this year in the Government Affairs Reportbut which failed topass.
In an effort to bring the state additional revenue, the budget package, HB 6704 (PA 13-184), requires the Department of Revenue Services (DRS) to create a tax amnesty program for taxpayers owing the DRS state taxes in Connecticut (excepting for motor carrier road taxes). The program will cover any taxable period ending on or before Nov. 30, 2013, and will run from Sept. 16, 2013 through Nov. 15, 2013.
Corporate Income TaxSurcharge
Two years ago, the state imposed atemporary 20% surcharge on certain C corporations that was set to expire on June 30, 2013. But HB 6704 extended the surcharge for an additional two years, applying it to 2014 and 2015 income years.
At the beginning of the legislative session, CBIA's Tax Committee held aforum for legislators and other public officials to share with them the role tax credits play in Connecticut's economic development. Most in attendance found the program enlightening and subsequently worked to ensure that harmful modifications were not made to these important economic development tools.
Ultimately, modifications were made to three tax credits that may be applied against a company’scorporate income tax liability:
- SB 1052</a> (PA13-232) expands the carry forward period from 15 to 25 years for donating land for educational purposes.
- SB 1079 raises the manufacturing trades corporation business tax credit for hiring apprentices from $4 per hour to $6 per hour. It also increasesthe total amount of credit that can be claimed from $4,800 (or 50% of the apprentice wages), to $7,500 (or 50% of wages).
- HB 6704 authorizes the Commissioner of the Department of Economic and Community Development to allow taxpayers with urban and industrial sites reinvestment tax credits to redeem up to $20 million in total credits each year, and permits bonding to accomplish this.This measure also places a moratorium for fiscal years 2014 and 2015 on the use of most film production tax credits for motion pictures.
To conform with current DRS practice, HB 6704 makes changes to how the state estate tax is calculated for Connecticut residents with property in other states.
In the FY 2012-2013 budget and tax package, lawmakers imposed what was to be a temporary two-year tax on electricity generators. HB 6704 continues this tax for three more months, to bring in additional $17.5 million in revenue.
Petroleum Products Gross EarningsTax
In an effort to increase the competitiveness of Connecticut manufacturers, SB 1052 excludes the application of the Petroleum Products Gross Earnings Tax (PGET) from cosmetic grade mineral oil. HB 6706 (PA 13-247) also exempts propane gas that is used for school buses from the PGET.
This year there were numerous property tax measures, including some that would have shifted even more of the property tax burden onto Connecticut employers. In the end, legislators rejected all but one modified version of those proposals.
- SB 965 makes numerous changes to municipal tax collection statutes. Among other things, itallows municipal officers to inspect, for collection purposes, commercial and financial information that is included in personal property declarations. It also broadens how special taxing districts and their treasurers can enforce tax liens.
- HB 5718 (PA 13-246) concerns municipals’ authority to provide tax abatements to encourage residential development. In part, it modifies current law bydecreasing,from $25,000 to $10,000, the minimum cost of improvements determining eligibility for a 50% exemption for up to three years. Towns may also provide the exemption for mixed-use developments which contain at least one residential unit, commercial, public, institutional, retail, office or industrial uses. This measure also authorizes East Hartford to establish a special taxing district in the area around Rentschler Field.
- HB 6565 (PA 13-204) eliminatesa municipality'sability to phase in an assessment decrease resulting from the town's revaluation of real property.
- HB 6704 contains a provision to reduce the assessment ratio in Hartford for certain properties within the Capitol City Economic Development District.
- HB 6706 contains several property tax measures. It extends the deadline for manufacturers in Bloomfield and Seymour to file for the manufacturing machinery and equipment (MME) tax exemption for certain past years. It also modifies the deadline for certain Danbury taxpayers to request the Office of Policy and Management (OPM) to reconsider their MME property tax exemption requests.
Another component of HB 6706 concerns land-value taxation. The notion of permitting municipalities to impose a higher property tax rate on undeveloped land than developed land was rejected by the legislative committee that normally considers such issues.
But the expansion of a current, but inactive, pilot program was included in HB 6706. This measure now allows three towns to participate in a land value taxation pilot program administered by OPM.
CBIA will stay on top of this issue as we are greatly concerned with the potential unintended and negative consequences of such a taxing policy.
The state budget and revenue package (HB 6704), contains three sales tax modifications.
- Boats: After listening to many marinas and boat dealers explain how Connecticut's sales tax policy caused them to lose a substantial amount of business to neighboring coastal states, the legislature voted to eliminate the sales tax for boats that are docked in the state for 60 or fewer days. They also lowered, from 7% to 6.35%, the sales tax rate on boats costing more than $100,000.
- Cigarettes: This measure modifies the point-of-sales rules for cigarettes by requiring any entity that puts tax stamps on cigarettes, and any licensed cigarette distributor, to collect and remit sales tax similar to other retailers.
- Clothing: Beginning June 1, 2015, the sales and use tax on most clothing and footwear under $50 was eliminated. The exception to this will be certain athletic and protective wear that usually isn't worn except for the special use for which it was designed. Other items that people usually carry, but don't wear, such as handbags, luggage, umbrellas and wallets will also remain taxable.
- Remittance Program: This measure also allows the DRS to require certain delinquent sales taxpayers to electronically remit their sales tax on sales made with a credit or debit card, or an electronic transfer. DRS is required to provide written notification to affected taxpayers by Oct. 1, 2013, and inform them about how the taxes will be remitted. This only applies to taxable periods from Oct. 1, 2013 to April 1, 2014.
The legislature mandated two studies this year. SB 1052 requires DRS to conduct a study of various aspects of the state personal income tax structure.
DRS also is mandated (in HB 6706) to submit a biennial tax incidence report to the legislature's Finance Committee and post it on the DRS website.
The report will cover the tax burden distribution for individuals and businesses, including the corporate business tax, excise taxes, personal income tax (the methods used by most employers to report their business income) and property tax.
The last two weeks of the state legislative session are always somewhat chaotic, and this year was no different. While nearly everyone considered HB 6566 extremely problematic at its start, an agreement in the 11th hour was reached between the administration and the Comptroller's office as to what business tax information could be safely and legally posted on a state website.
However, time ran out on the session and a similar proposal is expected to be introduced in the next legislative session.
For more information, contact CBIA’s Bonnie Stewart at 860.244.1925 or firstname.lastname@example.org.
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