Public Hearing for HB-7410

Recommendations contained in the Commission’s Report 2.0 have been incorporated into a bill that will be the subject of a public hearing before the General Assembly’s Finance Committee on Wednesday, April 10, 2019 at 11 AM in Room 2E of the Legislative Office Building.  

The bill is HB 7410, An Act Concerning Certain Tax Recommendations of the Commission on Fiscal Stability and Economic Growth and Establishing a STEM Scholarship program.

Scheduled to testify in this bill are Robert Patricelli, who co-chaired the former Commission on Fiscal Stability and Economic Growth, and  Jared Walczak, Senior Policy Analyst, at the Tax Foundation, Center for State Tax policy.

Here is their testimony and other material submitted to the Finance Committee:

Testimony of Robert Patricelli, who co-chaired the former Commission on Fiscal Stability and Economic Growth

Testimony of Jared Walczak, Senior Policy Analyst, at the Tax Foundation, Center for State Tax policy

Summary of Commission’s Tax Reform Proposal

FAQ’s on HB 7410 Commission Tax Reform Recommendations

1.  How does this bill compare with Governor Lamont’s tax proposal?

  • They appear to have quite different goals:  HB 7410 is aimed at economic growth without a net increase in taxes (revenue neutral), while the Lamont budget raises over $500 million in net new taxes, without material pro-growth provisions.

  • While both proposals rely on sales tax base broadening, the Commission plan would raise only $235 million in FY 2021 through 20 discrete changes, 36% of the amount raised in the Governor’s budget through 39 sales tax changes (not counting new taxes on plastic bags and sugar sweetened beverages).  Notable exclusions from base broadening or rate increases in HB 7410 compared to the Governor’s budget are legal services, accounting services, architectural services, engineering services, winter boat storage and increases in the boat sales tax, rejection of freezing the diversion of the car sales tax to the STP, rejection of increases in the hotel tax, and retaining the exemption for vehicle trade-ins.

  • The two proposals agree on repealing the Business Entity Tax and capping use of certain corporate tax credits, but the Commission recommends additional modest but important changes in business taxes:  repealing the capital stock method, conforming NOL treatment to the federal model, establishing a $25,000 threshold for business personal property taxes, and maintaining the planned reduction of the corporate income tax rate to 7.5% from 8.25% (MA is at 8.0%, NY at 6.5%, and RI at 7.0%).

  • While both proposals would repeal the gift tax, HB 7410 would also repeal the uncompetitive estate tax (only 11 other states have one).

2.  How does this bill compare to the Commission’s previous tax proposals? 

HB 7410 is an extract of the Commission’s November 2018 proposal.  It is much narrower, focusing solely on economic growth and retention/attraction of existing and aspiring high net worth people.  Commission Report 1.0 recommended broad tax changes involving $2.3 billion in realignments, including major changes in the Personal Income Tax at all levels.  Report 2.0 reduced the realignment to about $700 million, greatly reducing the PIT changes.  HB 7410 is more targeted still, at about $235 million in realignment, and leaves PIT rates where they are.  

3.  Aren’t upper income people taxed too low in Connecticut compared to low- and middle-income taxpayers? 

Actually no, compared to other states.  If we compare ourselves to our three contiguous states (MA, NY and RI)—to which it is easiest for employers and residents to move—CT has the second highest state Personal Income Tax rate at the top bracket:  CT is at a flat top rate of 6.99% (because of the recapture provisions), whereas MA is at a flat 5.1%, NY is at 8.82% for incomes over $1.08 million (but below CT under that income level), and RI tops out at 5.99%.  Moreover, on the Institute on Taxation & Economic Policy’s October 2018 “Tax Inequality Index”, CT ranks better in terms of the relative rate of taxation of the top 1% of taxpayers compared to the bottom 20% than does MA and RI, though behind NY.  Overall, we rank better than average on the ITEP index at 29th (50th is best)—in New England, New Hampshire is 16, Massachusetts is 30, and Rhode Island is 32.  Increasing taxes on the rich will only worsen our competitive position and lower prospects for growth.  In the previous 10 years, there have been three increases in CT’s top personal income tax rates and these increases have no doubt contributed to our negative GSP growth and falling competitiveness.

4.  Where does CT stand in terms of comparative tax rates on business? 

We are high, unacceptably so, in 47th position on the Tax Foundation’s “2019 State Business Tax Climate Index”.  MA is 29, NY is 48, and RI is 37.  Enactment of the provisions of HB 7410, assuming other states stay the same, would raise our ranking to a more acceptable 39th position.  We were 31st in 2012.

5.  But why is it necessary to eliminate the unified gift and estate tax? 

Because this bill is all about the critical issue of economic growth and competitiveness, in this case competing for business owners and other wealthy people.  No other state has a gift tax, and only 11 have estate taxes—two states eliminated theirs last year.  Retaining and attracting upper income taxpayers and people who aspire to have high net worth should actually be one of our goals.  If you were an entrepreneur hoping to build a valuable business, would you locate in the state that will tax away at death 12% of the value of your nest egg above $10 million?  Specifically, if you are able to build your net worth to, say, $50 million, CT will take almost $6 million of that in estate taxes—why would you want to locate here or continue to live here after you are retired?  We need our wealthy people--they pay most of the income taxes (families with incomes below $50,000 pay less than 5% of the state’s income tax revenue).  In 2013, only 357 families accounted for almost 12 percent of income tax yields.  

5.  But aren’t you ignoring the issue of income inequality? 

No—we fully acknowledge income inequality as a major societal issue in the state and country.  The best long term answer is to generate more and better paying jobs in our state—that must be the overriding goal.  Trying to fix the problem through higher taxes on business or the wealthy will undercut our ability to compete with nearby states and to generate those jobs.  We can do some things at the state level--the Commission has consistently supported an increase in the minimum wage to $15/hour, and agreed with the Governor’s proposal to expand income tax credits for middle income families who pay real estate and car taxes.  But the principal attack on income inequality has to come from the federal level,  in a way that doesn’t pit states against each other.

6.  If you don’t favor raising personal income or business taxes, where would you go for extra revenue at the state or local levels?   The Commission’s preference was not to raise revenue, but to cut expenses—especially fixed expenses such as employee fringe benefits.  However, to the extent that new revenue is needed the most obvious place to look is at non-tax revenue, mostly user charges and fees.  According to the ITEP materials (see Appendix C: State Reliance on Non-Tax Revenue, at page 30), CT is dead last among the states in terms of the percent of total state and local revenue coming from non-tax sources, at 16.9%, compared to a U.S. average of 31%, MA at 25.5%, NY at 23.4%, and RI at 27.5%.

6.  What is the rationale for more bonded spending on STEM scholarships, especially in light of the Governor’s debt diet?

  • Filling the STEM skills gap is central to supporting economic growth.  Our growth imperative is such that room must be found in the General Obligation bond budget to accommodate this priority, even if the “diet” is slightly less severe in the initial years.

  • Most STEM graduates come from our private colleges and universities, whereas current state scholarship support is limited to public institutions.  This is self-defeating.

  • Technology will be at the heart of new job growth—we need to recognize that.  This scholarship aid will help students from lower and middle income families to be prepared to participate in the new economy.

View the full document here: FAQ’s on the Commission Tax Reform Recommendations