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Connecticut Begins Comprehensive Tax System Review

2 min readBy: Joseph Bishop-Henchman

I testified last week to the newly established Connecticut TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Review Panel, which is undertaking a comprehensive look of the state’s tax system throughout 2015. Co-chaired by former Rep. Bill Dyson (D) and former Sen. Bill Nickerson (R), the panel has been instructed by the Legislature to consider and evaluate options for state and local revenue system reform. The current goal is to complete a final report by February 23, 2016, although they may move that up to January.

As its first step, the Panel’s executive director, Robert Ebel, reviewed the activities of other states’ tax reform commissions for best practices. His initial memo suggests setting guiding principles and goals for the Panel, which he converges into six main concepts: revenue productivity, reliability, equity, neutrality, competitiveness, and simplicity. While Panel members may disagree about particular proposals, the idea is that the revenue system as a whole should keep these principles in mind as they work.

It’s a sensible place to start, and I can honestly say I was impressed by the amount of homework Ebel and his staff did for his memo. I was able to chat with a few Connecticut legislators, and generally there is a willingness to undertake a comprehensive look at the tax system, the first in decades if not ever. I limited my Panel testimony to a review of our publications and a few tax policy areas where Connecticut deviates from most other states:

  • One of three states with an income tax recapture provision, leading to a higher tax rate than advertised
  • Income tax brackets are not indexed for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power.
  • A temporary 20 percent corporate tax surcharge that adds uncertainty
  • No net operating loss (NOL) carryback provision (Governor Malloy’s current budget proposal reduces the carryforward provision as well)
  • One of 18 states with a capital stock tax, a literal tax on investment
  • Estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. and uncoupled to the federal threshold
  • Middle-level sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. rate but relatively low breadth (base of transactions subject to tax)

The Panel expressed an eagerness to hear from all points of view, especially Connecticut taxpayers, as it conducts its work in the coming months. Their next meeting is scheduled for May 12 in Hartford.