Is it time to overhaul Connecticut’s tax system?

Rep. Patricia Widlitz, D-Guilford, is co-chairwoman of the Finance Committee.

What’s the fairest way for Connecticut to raise $15 billion in taxes each year? Who should pay more? Is $15 billion too much? Too little? And how does the tax system affect the state’s economic competitiveness?

These are just a few of the questions that might be tackled over the next two years in what some predict could be the most dramatic overhaul of the state’s tax system since the income tax was enacted in 1991.

The legislature’s Finance, Revenue and Bonding Committee is expected to endorse a measure in the next few weeks that could launch a top-to-bottom analysis of how Connecticut taps taxpayers’ wallets. And there’s as much debate on what questions need to be asked as there are ideas to change the system.

“Every session there are more and more proposals to adjust or repeal or add different taxes,” said Rep. Patricia Widlitz, D-Guilford. This trend has intensified since Connecticut emerged from the Great Recession almost four years ago, she said. “It doesn’t make any sense to address all of these individually without looking at how the entire tax package fits together.”

Widlitz said it’s important that any study undertaken not begin with any prejudicial assumptions, i.e., business taxes must be cut, the wealthy must pay more, the poor must pay less, etc. But it’s equally important, she added, that all stakeholders in this process – business, labor, state agencies and Connecticut households — all be heard from in a process that likely will take two years to complete.

“We certainly want to keep in mind the desire of people to live here and stay in Connecticut, and what kind of a tax system we will need to make that possible,” she said.

But that hasn’t stopped a host of ideas from flooding in about very specific aspects of Connecticut’s tax system.

• The Connecticut Hospital Association wants lawmakers to look closely at the burden hospital taxes place on 30 acute care facilities.
• The state’s Realtors’ association wants a seat on any tax task force, and insists any study must consider the burden Connecticut’s hefty property taxes place on the real estate market.
•  The Connecticut Conference of Municipalities, the chief lobbying group for cities and towns, also wants a seat at the table to ensure that local property taxes are addressed.
• And two nonprofit social service advocacy groups say it’s time for Connecticut to join most other states and offer income tax deductions for households raising children.

Gov. Dannel P. Malloy’s budget office hasn’t testified on the measure. But the administration’s chief tax official, Department of Revenue Services Commissioner Kevin B. Sullivan, said Tuesday that it’s crucial for lawmakers to focus on a tax policy that accommodates job growth and economic development efforts.

“This is not about finding ways to raise new revenue,” Sullivan said. “If the proposition is finding ways to raise more revenue, then it’s not going to be a useful discussion.”

Sullivan added that New York state officials effectively used two studies released over the last year to streamline that state’s tax system and spur economic growth.

Malloy and the 2011 legislature ordered more than $1.5 billion in taxes to help close a huge deficit in state finances then, and a spokesman for one of the largest state employee unions said both should be praised for taking an unpleasant-yet-necessary step.

But Larry Dorman, spokesman for Council 4 of the American Federation of State, County and Municipal Employees, said Connecticut still has serious problems tied to tax inequality and insufficient revenues – both at the state and municipal levels – that cannot be ignored by any study.

Connecticut had relied for decades on its sales tax to provide the chief source of non-federal funds for its government, with taxes on corporations, capital gains and estates providing important supplemental revenue. Fuel taxes were – and remain – the chief means to pay for road, bridge and rail upkeep.

Things changed dramatically 23 years ago when lawmakers and Gov. Lowell P. Weicker Jr. adopted a flat tax on income and lowered the sales tax. They also got rid of a double-digit tax rate on investment income, which instead was subjected to the top income tax rate at the time – 4.5 percent – a big tax break for some of Connecticut’s wealthiest households.

Meanwhile, the property tax remains the chief source of revenue, along with state grants, for city and town budgets. Communities have praised Malloy and lawmakers, not only for sparing municipal grants from budget cuts in 2011, but also for modestly increasing state aid since then. Still, local leaders argue property taxes remain the most regressive levy in Connecticut, falling especially hard on small businesses and on middle-income households.

“Things have gotten worse with the regressive nature and with our over-reliance on the property tax,” Dorman said. “And we still have a revenue problem. We tax labor, and not wealth in Connecticut … to provide the top-notch public services that the people need and demand.”

Dorman added that any study striving for fairness “has got to address the state’s problems with economic inequality, job growth and a sagging middle class, and all of that is a function of our tax structure.”

William J. Cibes Jr., who was state budget director under Weicker and also co-chairman of the finance committee in 1989-90, told the committee that “high property taxes are a major reason why Connecticut’s tax system is broken. So property tax relief would lessen the economic burden on businesses, municipalities and individuals.

“Property taxes are relatively stable,” Cibes added. “But when a state relies excessively on property taxes to fund important services like education, infrastructure and public safety, businesses and individuals are punished.”