Unchanged since 1991, sales tax now is part of deficit equation

The state income tax has dominated legislative revenue debates since its controversial enactment nearly two decades ago.

But the sales tax, whose base rate of 6 percent hasn’t changed since that watershed debate in 1991, may be back in the spotlight next year as politicians begin the task of closing the largest projected budget deficit in state history.

And though the sales tax’s entire annual yield is $200 million less than the $3.4 billion deficit forecast, it is a tempting target for several reasons: Connecticut’s rate is lower than its neighbors’, there are billions of dollars in exemptions that could be repealed, and there is a growing sentiment that Internet sales should be subject to the levy.

sales tax comparison 9-2-10

“Certainly there are advocates for increasing the sales tax and I absolutely would expect it to be on the table next year,” Sen. Eileen M. Daily, D-Westbrook, co-chairwoman of the tax-writing Finance, Revenue and Bonding Committee, said Wednesday.

Democrats, who have controlled the legislature for most of the past 24 years, “have been more comfortable looking at the income tax and creating revenue there,” said the panel’s other co-chairman, Rep. Cameron C. Staples, D-New Haven, who is not seeking re-election. “But I think when they get to the tax side of the budget next year, the overall tax picture has to be looked at.”

The engine driving that larger perspective is a projected shortfall equal to nearly one-fifth of all current spending.

Though most Democratic candidates for state office insist no deficit of that size can be closed without an income tax hike, many also concede that a combination of spending cuts and higher income rates on the wealthy won’t be sufficient.

So if the middle class is in for a tax hike as well, it might be easier to sell politically by spreading that extra burden across more than one type of levy. And some argue a small addition tax on each purchase is less visible than a larger payroll deduction.

One big objection to the sales tax in the view of some officials is that it is regressive – meaning the burden doesn’t fluctuate based on ability to pay, as with an income tax.

“The conventional wisdom in Connecticut was that raising the sales tax really gets Democratic voters upset, that it disproportionately hurts lower and middle income families,” said political consultant Jonathan Pelto of Mansfield, a former state representative and former strategist for the Connecticut Democratic Party. “For many years there was a sense that you just didn’t talk about the sales tax.

“Now the pendulum has swung and it’s perceived as the lesser of two evils,” he said.

Some Democrats, though not excited by the prospect of sales tax increases, are willing to discuss them if they at least can be paired with something else more appealing.

Democratic gubernatorial candidate Dan Malloy insists, as do his competitors, that his primary focus will be on reducing state spending.

And though Malloy hasn’t outlined any specific tax hikes he would consider, both he and Daily noted that Connecticut does levy a lower sales tax rate than all of its neighbors.

“I actually think the property tax is the most regressive tax in Connecticut,” Malloy, a former mayor of Stamford, said Wednesday, adding that if lawmakers do propose a modest sales tax hike, with revenue being shared with cities and towns, it could make sense. “Having local options (to raise revenue) is a good way to take the pressure off of property taxpayers,” he added.

Better Choices for Connecticut, a coalition of labor, religious, nonprofit social service and other advocacy groups, offered a multi-tiered plan last March to raise over $1.3 billion in new annual tax revenue.

Included among its proposals was boosting the sales tax rate to 6.5 percent and using $50 million of the $260 million that increase would raise to offer a new earned income tax credit to help Connecticut’s poorest families.

Senate Majority Leader Martin M. Looney, D-New Haven, one of the legislature’s most vocal advocates for an earned income tax credit, said a better option for funding such a program would be to close existing sales tax exemptions rather than raise the overall rate.

“I think looking at the exemptions is always worth doing,” Looney said.

Connecticut has $5.3 billion worth of tax breaks on its books and the sales tax is the most popular target for them, featuring just over $3 billion worth of exemptions and special, reduced rates for goods or services, according to a March report from the nonpartisan Office of Fiscal Analysis.

Even after popular, longstanding breaks for groceries, motor vehicle and home heating fuel, prescription medication, clothing and college textbooks are discounted, nearly $1.6 billion worth of exemptions and reductions remain.

Malloy said all of these breaks should be analyzed at least every three to five years and put to a stringent test. “Those that don’t produce jobs, or are not tied to some reasonable charitable function – including education – should be the first to go,” he said.

And though some Republican legislators and business advocates have argued canceling sales tax breaks is merely another form of sales tax increase, Democrats aren’t the only ones considering them.

Chester First Selectman Tom Marsh, a former Republican and now a third-party candidate for governor, said that while canceling tax breaks would impose new burdens on some consumers and businesses, it would be worthwhile if it helped end state government debt, and if some of the revenue could be shared with cities and towns.

“No matter how you slice it we are taking money out of the economy, purchasing power out of people’s pockets,” he said. “But we do need to address the deficit and we should broaden the sales tax base.”

GOP gubernatorial candidate Tom Foley, who insists he can eliminate the deficit without raising tax rates, has not ruled out canceling tax credits or exemptions that are not fueling economic growth.

But Foley also said Connecticut’s comparatively lower sales tax rate is not an incentive by itself to warrant an increase. “To say that just because our neighbors are charging more that we should too is missing the point,” he said. “Middle class families here are already struggling under significant financial pressures.”

“No tax increase is harmless,” said Bonnie Stewart, vice president of the Connecticut Business and Industry Association. And though Connecticut has a wide array of sales tax exemptions on its books, it also taxes more business services than most other states, she said, adding that officials need to focus on cutting spending, not on raising revenue.

If there is any common political ground in the sales tax debate, it might lie in the area of Internet sales.

Democrats and Republicans on the finance committee backed a bill earlier this year patterned after the so-called “Amazon law” enacted in New York.

The measure was designed to collect what some officials estimate are tens of millions of dollars in unpaid taxes tied to online sales.

The legislation would define Amazon and other online giants as having a “nexus” or presence in this state if they do a threshold amount of sales through local affiliates whose Web sites refer customers to major retailers.

Though the full Connecticut legislature opted not to act this year, many lawmakers predict the measure will get a closer look in 2011.

In all, states lose a total of $7 billion a year in sales tax revenue, according to an analysis by the Center on Budget and Policy Priorities, a nonprofit fiscal and public policy group based in Washington, D.C. Amazon.com is one of the nation’s largest online retailer with thousands of affiliates nationwide, the center says.

Rep. Vincent J. Candelora of North Branford, ranking House Republican on the finance committee, who opposes any sales tax increases, said addressing the Internet issue doesn’t fall into that category. “I think it’s important to bring some parity,” he said, adding that small businesses without an online presence are being harmed by Internet retailers who don’t’ collect sales taxes – and in some cases mislead consumers through advertising into believing no sales tax is owed.

Connecticut residents are required by law to pay the sales tax on goods purchased tax-free either out-of-state or online. Those obligations, known as the “use tax,” are supposed to be reported on annual state income tax returns.

But officials concede many residents do not pay the use tax. The $13.4 million in use tax paid last year by Connecticut income tax filers represented less than one-half of 1 percent of all sales tax revenue.