Sales tax may take center stage in state budget debate
Leaders of the legislature’s tax-writing panel have made it no secret they hope to minimize new taxes on Connecticut corporations this year as politicians and business leaders alike hope for the economy’s best year since the Great Recession ended.
But one key alternative the Finance, Revenue and Bonding Committee is expected to recommend this week involves a major overhaul of Connecticut’s sales tax — a move the state’s chief business lobby warns could damage the economy worse if handled improperly.
With big deficits still projected for each of the next two fiscal years, the prospects for avoiding tax hikes altogether in the new budget appear slim as budget deliberations enter a crucial period.
“This is extremely, extremely dangerous,” said Bonnie Stewart, tax policy specialist for the Connecticut Business and Industry Association.
“When you increase the cost of doing business you make the state less competitive,” she said. But if the services or goods businesses need to operate or to produce finished products are taxed, things can get bad fast, Stewart said.
“People aren’t fooled by looking at sales tax rates,” she said. “And believe me, the business person deciding whether or not to hire a new person knows when the tax is there.”
The Appropriations Committee, which develops the spending side of the budget, was scheduled to issue its recommendations Monday for next fiscal year and for 2016-17.
Meanwhile, the finance panel — which must finish its work by Friday — will recommend any revenue changes for the coming biennium. But it is not required to develop a revenue plan that matches the spending suggested by appropriations.
Their respective proposals, along with the two-year budget Gov. Dannel P. Malloy proposed on Feb. 18, all will be under consideration when the administration and legislative leaders begin talks in the coming weeks to negotiate a final budget.
Shortly after Malloy presented his $40 billion, two-year plan, businesses complained loudly. A 20 percent surcharge on the corporation tax, which was scheduled to end this year, would be made permanent. And the governor also wants to raise $350 million in new corporation taxes over the next two years combined by restricting credits and making other rule changes.
Sen. John Fonfara, D-Hartford, co-chair of the finance committee, told The Mirror this proposal is among the most troublesome to the panel.
The Connecticut Business and Industry Association warned that restricting credits would weaken business confidence and stymie job growth.
The committee’s response, Fonfara said, lies primarily within the second-largest source of revenue to state government: the sales tax.
It’s expected to bring in more than $4.2 billion this fiscal year – enough to support almost one-quarter of all general fund spending. And that’s despite roughly 70 exemptions on the books, which, if repealed, would yield another $2.9 billion, according to the legislature’s nonpartisan Office of Fiscal Analysis.
Even if the traditional exemptions with huge political support are removed from consideration, things like groceries, medicine and medical supplies, and gasoline, there is almost $1.4 billion in potential revenue available — in theory.
A big chunk of the remainder involves what are commonly called “business inputs.” These are various services companies may use, such as data processing, accounting and vehicle maintenance. They also include motor vehicle and marine fuels, certain business equipment, repairs to manufacturing equipment, and certain raw materials.
“I don’t know if there are any sacred cows here,” Fonfara said.
But the goal isn’t just to eliminate sales tax exemptions and raise revenue to mitigate potential corporation tax hikes, he said. The goal also is to use some of that extra revenue to reduce the overall sales tax and hopefully stimulate the retail sector of Connecticut’s economy.
The ranking Republicans on the finance committee, Sen. L. Scott Frantz of Greenwich and Rep. Chris Davis of Ellington, both said they are wary of tampering with the sales tax.
“We have not had any public hearing on the sales tax outside of the governor’s proposal” to lower the rate from 6.3 to 5.95 percent, Davis said, adding that the public should have a chance to sound off before any significant overhaul of the system is considered.
“I’m afraid any tax increase will hamper our anemic economic recovery,” Frantz added.
The University of Connecticut’s economic think-tank predicted in February that the state’s economy, after progressing modestly for the past three years, was poised to take off this year and next.
The Connecticut Center for Economic Analysis said one model shows the state could add as many as 40,000 new jobs by the end of 2016.
Still, both Fonfara and his fellow co-chair, Rep. Jeffrey Berger, D-Waterbury, have said the finance committee is trying to find the best solution to a very tough budget.
The legislature’s nonpartisan Office of Fiscal Analysis says state finances, unless adjusted, would run more than $1.3 billion in the red next fiscal year, and $1.4 billion in deficit in 2016-17.
And while early income tax returns following the April 15 deadline showed tax receipts running a modest $87 million ahead of projections, updated numbers reported last Friday showed receipts $102 million below projections. And since April income tax receipts are used to develop revenue projections for the coming fiscal years, a subpar April could lead analysts to worsen those deficit forecasts.
Meanwhile, the Appropriations Committee is facing heavy pressure from rank-and-file lawmakers from both parties to reverse hundreds of millions of dollars in cuts to social services recommended by Malloy.
“I am comfortable at this point from what I hear that Appropriations Committee leadership is doing the very hard work of producing a spending package that meets many of the concerns we are hearing” while trying to control overall spending, Fonfara said.
“We will have to do our best as well.”
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