In a refreshingly bipartisan and unanimous vote the General Assembly’s Finance, Revenue and Bonding Committee agreed it was time to engage in a thorough review of state and local government’s primary taxes.
Substitute House Bill 5545 would take a two-year review of the corporation, sales and use, personal income tax, local property tax, estate and gift, and excise tax. While the charge they give themselves differs for each tax, the overall goal is to look at “whether each tax encourages economic growth, is efficient, stable, simple and predictable, and fair and equitable.”
This is a good thing. But something’s missing. Tax expenditures. Tax expenditures are revenues we decide not to collect. Like, say, the sales tax on food products for human consumption. That’s big at an estimated $426 million for fiscal year 2013. Or small, like the Real Estate Conveyance Tax on the transfer of Burial Rights for a cemetery lot. That costs us $800,000 per year.
In all, the collective tax expenditures, or revenue we have chosen to forgo, on the books were estimated by the General Assembly’s nonpartisan Office of Fiscal Analysis (OFA) for the fiscal year 2013 to be $6.769 billion.
To give a little more perspective to how much that is, the income tax brings in around $9
billion. The sales and use tax brought in $3.897 billion in 2013. The OFA 2013 projected sales and use tax expenditures alone were projected to be $3,710 billion.
A lot of our current tax expenditures are sound policy. That large exemption for food was
enacted to counterbalance the inherent regressive nature of the sales tax. Though if our
legislature felt it was better policy to broaden and lower the sales tax by eliminating many of the exemptions to spur more interstate competitiveness while, say, expanding the use of the earned income tax credit to counteract the higher sales tax burdens on lower income people, then that might be sound, too.
And therein lies the problem. The only real time the General Assembly looks at tax
expenditures is when they need to find some revenue. Like finding some revenue this year that isn’t spelled k-e-n-o.
Whether any or all of our current tax expenditures may be sound policy choices is secondary.
What we need to do is make their review a regular part of the budget process. It isn’t
currently. The closest thing our legislature does is have the OFA compile a list of all tax
expenditures along with a one-word description of their rationale. Like “expediency” or
“conformity.” The latest report, due January 2014, isn’t yet publicly available.
In 2011, the Minnesota Department of Revenue reviewed their state’s policies on tax
expenditures and made a series of recommendations for change. Among them were:
- Establish an eight-year evaluation cycle in which each tax expenditure would be reviewed;
- Require evaluations to list and analyze selected alternatives to the current provision;
- Create a “revenue neutral” sunset provision whereby the effective tax rate would be lowered if the tax expenditure wasn’t extended;
- And, fully integrate tax expenditures into the biennial budget process and include total expenditures for each tax in budget summaries to show their full impact.
While time is short, it isn’t too late to add tax expenditures to the Finance Committee’s list for review. Such a show of bipartisan collaboration should not only be commended, but given the opportunity to have a truly full and transparent review of major taxes and tax expenditures – especially including the property tax.
Jefferson Davis of Pomfret is a board member of 1000 Friends of Connecticut.