Economists say scrapping sales tax breaks could aid the poor and attack the deficit

Ready to pay state sales tax on all clothing purchases? How about on gasoline and heating fuel?

While the potential furor over such moves might give legislators nightmares, they could be part of a tax reform effort that both helps Connecticut’s poorest households and reduces the huge state budget deficit, according to the new quarterly economic review from the University of Connecticut.

“The economy is not out of the woods yet, but at the same time, we’re not out of options,” economist Steven P. Lanza, executive editor of The Connecticut Economy, said Wednesday as he presented the university’s latest quarterly review at the Connecticut Center for Advanced Technology offices in East Hartford.

In an article titled “Roads Not Taken,” UConn economists analyzed the $5.3 billion worth of credits, exemptions and other tax breaks on the state’s books, focusing particularly on the just over $3 billion in sales tax exemptions.

Many of the items spared from the 6 percent sales tax – including gasoline and heating fuel, groceries, prescription medications and clothing that costs less than $50 – typically are viewed as necessities that must remain exempt to help Connecticut’s neediest households.

“The better question might be: If one’s goal is to help the poor, why exempt from sales taxes so many goods that are bought by the non-poor too?” wrote economics professor Arthur W. Wright, who authored the tax expenditure analysis.

Middle-income and wealthy families also purchase food, moderately priced clothing, gasoline and medication.

And the list of exemptions also includes massages, winter boat storage and repair, college text books and other goods and services that are not readily purchased by the state’s poorest families.

“Could it be that the true rationale for these exemptions is special-interest expediency, on behalf of the people selling the exempted goods and services?” Wright wrote, adding that legislators should take a careful look at the dozens of sales tax breaks currently in place. “They’re hard to define, slippery to measure and – worst of all – widely scattered throughout the tax code with many resulting beneficiaries and hence, potential political defenders.”

Wright said following Wednesday’s presentation of the review that reform of the state’s system of tax breaks should not be seen as a fiscal silver bullet capable of resolving the entire $3.67 billion deficit being projected for the fiscal year that begins July 1.

Rather it is one mechanism of identifying new revenue that could be used, along with tax hikes and spending cuts, to cover that shortfall.

And though Wright didn’t recommend any specific tax reform proposals to assist low-income families, he said the most effective ones generally lie within the income tax system, not the sales levy.

“What does it mean to be poor?” he said. “It means you don’t have income.”

For much of the past decade, a coalition of social service advocates and a handful of Democratic legislators from urban centers have pushed unsuccessfully for adoption of a state earned income tax credit.

Adopting a state EITC “is the most critical thing we can do to assist low-income, working families in Connecticut,” Senate Majority Leader Martin M. Looney, D-New Haven, arguably the legislature’s most vocal advocate for a state credit, said Wednesday. “These families have to spend just about everything they earn just to keep themselves going, and this would help them begin to save.”

Advocates want a state EITC patterned after a federal program that’s been in place since 1975. A refundable credit, the EITC reduces or eliminates the federal income taxes a family owes, provided that household earns below a threshold poverty level.

Recent proposals for a state credit have carried an annual cost estimate ranging from $20 million to $30 million.

Streamlining the state’s confusing array of sales tax exemptions also could be used to raise revenue while mitigating against an overall rate increase, Wright added. “In general in economics, the more elaborate the game, the more chances there are it will get screwed up,” he added.