Lembo challenges state to evaluate its tax breaks
Studying Connecticut’s tax system can be as exciting as reading the phone book — and it takes just as long.
There are dozens of credits, exemptions and other breaks, some dating back decades, spread across more than 10 different taxes with a combined annual value topping $5.4 billion.
It would be nice, Comptroller Kevin P. Lembo said, if state officials knew whether these breaks actually improve Connecticut’s economy.
Some of these credits, exemptions, etc., are head-scratchers.
There’s a sales tax charge on yoga instruction, but only if provided in a private studio and not through a college or university.
Therapeutic massage services remain exempt, while other spa services, such as body waxing and facials, are not.
There’s a new luxury tax on boats and yachts costing more than $100,000. But when the time comes to store or repair them, those services are tax free.
And because some of these policies date back more than 30 years, few, if any, in state government can recall why the oldest ones were enacted in the first place.
“We’re deploying all of these resources, but are we getting a return?” Lembo said in an interview this week. “We have so few tools in our economic arsenal, we need to make sure we use them strategically and carefully.”
The legislature’s nonpartisan Office of Fiscal Analysis produces an biennial report on the more than 100 different tax breaks in the statutes, covering their cost, the year they began, and the rationale offered — if any was given — upon adoption.
But even this phone-book-sized report, Lembo said, doesn’t address arguably the most crucial of questions: What effects are these policies having, besides their cost to the state treasury? Do they promote economic activity? Do they create or retain jobs?
“Demonstrating that the desired outcomes of these initiatives have been achieved will reinforce policy decisions and increase public confidence,” he said.
Lembo, who began his first term as Connecticut’s chief fiscal guardian in January, acknowledged that he has embarked down a path that has tripped up many others in the past.
Sen. Tony Guglielmo, R-Stafford, a veteran member of the Finance, Revenue and Bonding Committee, made it a point nearly every year in the past decade to revisit this tax morass. Along with former Rep. Demetrious Giannaros, D-Farmington, Guglielmo argued that with some modest effort, state government could streamline its system, particularly its sales tax, and lower overall tax rates.
“I never even really came close to getting people to look at this, and Demetrious never did either,” Guglielmo said. “It’s kind of a daunting task. I think people look at it and say, ‘Do I really want to go through all that?'”
The laborious task is further complicated by politics.
Legislators could shave 1 or 1.5 percentage points off the 6.35 percent sales tax by ending most exemptions, and using the corresponding savings to reduce the overall rate, Guglielmo said. And this wouldn’t require canceling the most popular sales tax exemptions, such as groceries, gasoline and prescription drugs.
But anyone trying this would quickly be charged with increasing taxes, at least by those businesses that lose their exemption.
“It doesn’t matter that you’re increasing taxes on a small group of people who’ve enjoyed a nice break from the beginning,” Guglielmo said. “Especially in this environment, it’s very easy to attack anyone doing that.”
Tim Phelan, president of the Connecticut Retail Merchants Association, declined to comment for this story.
But both Guglielmo and Lembo said that once the debate gets past politics, there are legitimate questions that need to be answered.
Expediency, or a lobbyist?
When nonpartisan legislative analysts cite the rationale behind various tax breaks in their report, they sometimes offer a one-word response: “expediency.” Guglielmo said that translates into, “Somebody had a good lobbyist,” rather than a compelling economic argument for the break they received.
The political climate around the Capitol changed somewhat in 2005 after legislators and then-Gov. M. Jodi Rell enacted campaign finance reform legislation that effectively gutted the fundraising power of Connecticut’s lobbyists.
“But that doesn’t mean there isn’t a lobbyist or more behind each one of these” tax breaks, Lembo said. “The pressure will be there for anyone who looks at them.”
The comptroller said Connecticut already has a good model to work with if it’s ready to tackle this issue. The legislature created the Business Tax Credit and Tax Policy Committee to evaluate existing credits, determining whether they have produced new investments, jobs or other measurable economic benefits.
The committee would recommend changes whenever tax policy “is not providing a measurable benefit sufficient to justify any revenue loss to the state.”
Or rather it would have, Lembo noted, had it met more than once.
This also isn’t a new feature when it comes to state study panels and sticky fiscal policies.
The state auditors suggested in 2010 reconvening the Connecticut Progress Council, a “permanent” fiscal accountability agency that stopped functioning after issuing one report in 1994.
A second panel charged in the early 1990s with finding $10 million in annual state budget savings through efficiencies “never met or filed annual reports,” also according to the auditors.
“I think we have to take this seriously,” Lembo said, adding that he doesn’t expect the culture to change overnight, or to have a new panel ready to make recommendations before the next regular legislative session ends in early May. “I think that might be too ambitious of a time frame. But I do hope it can become part of a regular review process.”
Lembo urged Gov. Dannel P. Malloy in writing this week to support a permanent tax policy review panel. Malloy said Thursday he hadn’t yet reviewed the comptroller’s proposal.
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