Gov. Dannel P. Malloy apparently has learned from former Gov. John G. Rowland’s mistake.
By proposing to rebate sales and gasoline taxes – instead of income taxes – Malloy would spare nearly all recipients from having to share about 30 percent of their bonus with the federal government.
Rowland made that mistake in 1998 when he and the General Assembly launched the first tax rebate program in state history. Just over $100 million in income tax receipts were sent back to residents, with $50 going to individuals and $100 to couples.
The rebate proved popular in the polls, and Rowland sailed to easy re-election that November. But many taxpayers grumbled the following spring when they learned they had to pay federal income taxes on their state tax rebate.
Federal law allows households to deduct state and local income or sales taxes – but not both – from their federally taxable income. But they also must report any state refunds to claim the deduction. In other words, if you deduct state income taxes paid from your federal tax obligation, you also have to report any state income tax rebates or refunds.
The lesser of the two tax burdens, the sales tax deduction, generally is claimed only by residents of states without an income tax.
Rowland and the legislature followed their first rebate in 1999 with a second program, this time announcing that it would be paid for with revenues from the state sales tax.
Malloy, who announced his rebate of sales and gasoline taxes Thursday morning, said that while the details still must be negotiated with the legislature, he is confident Connecticut residents won’t be paying federal taxes on their rebates.
“It has been used before,” he added, “and quite successfully.”