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From Governing’s
Two other new fiscal measures developed at the time helped insulate Connecticut from future economic downturns. One was a rainy day fund. The other was a constitutional amendment to cap spending growth at the rate of the five-year average annual growth in personal income.
This short history could be a lesson to states such as Tennessee and Texas, which still view the income tax as a tool of the devil. Connecticut hasn’t gone to hell in a hand-basket, and the wealthy residents of Fairfield County didn’t make a mad dash for low-tax New Hampshire. On the other hand, the income tax was no panacea, either. Even with a nicely balanced stream of revenues, the last couple of years have been painful for Connecticut. Largely as a result of plummeting capital gains receipts, revenues fell 9.5 percent in 2002, and the state finished the fiscal year more than $800 million in the hole. To cover that gap and pass a balanced 2003 budget, legislators cut spending, cleaned out the $495 million rainy day fund and raised cigarette and diesel taxes — the first such increases during Governor John Rowland’s administration. With the existing system only a decade old, massive restructuring as a way to generate revenue wasn’t considered. That doesn’t mean it won’t be. Still facing a $600 million budget gap in the current fiscal year, Rowland is backing a “millionaires’ tax.” This measure would impose a levy of 5.5 percent — one point higher than the standard income tax rate — on incomes of more than $1 million. This would affect at least 6,500 taxpayers and generate more than $90 million this year, and as much as $160 million in 2004. Rowland was an unlikely champion of the new tax, since he vetoed the same measure when it passed the legislature a year ago. But he changed his mind amid rapidly worsening fiscal circumstances. After all the discussion, a special session ended early this year without resulting in any tax hikes. Connecticut may also decide to eliminate some sales tax exemptions. Rowland has proposed scaling back the tax-free purchase of clothes and sneakers under $75. But a significant expansion of the sales tax base will be difficult. The state already has a broader sales tax base on services than many of its neighbors: It’s the only state in New England, for example, that taxes construction contracts. As a result, there are strong objections to casting a wider net. “From an economic incentive position, Connecticut can’t afford to broaden its base until other states catch up to where it is,” says Richard Nicholson, former general counsel to the state’s Revenue Department. Alternatively, the state could pick up some additional revenue by stiffening corporate taxation laws, as some legislators have proposed. Connecticut operates under a “single sales” formula for determining income tax liability for select industries, which eliminates a corporation’s payroll and property from the tax base and results in a lower payment. Unfortunately, it also results in an unfair playing field for doing business in the state. “We need to look at those formulas,” says Senate Majority Leader Martin Looney. One way to make the corporate tax more lucrative to the treasury would be through combined reporting, which would force companies and their subsidiaries to file income taxes jointly. This would prevent the shifting of income to states that don’t tax holding company profits. Connecticut’s coffers did receive a larger-than-expected windfall thanks to a “cybershame” program, through which the Department of Revenue lists the top 100 delinquent taxpayers on its Web site. The state estimates it has collected about $134 million since it began the list in 1997, and Commissioner Gene Gavin describes the program as the department’s most cost-effective initiative. Although out in front on cybershame, Connecticut has lagged behind in other areas of tax technology. Taxpayers were permitted to file their returns through the Web for the first time just last year, and only 15,000 of them took advantage of the option. The multitude of returns filed on paper slows the process down; the forms are still handled using limited imaging. The department hopes to fold an imaging system into a later phase of its integrated tax system, the first piece of which is scheduled to go live by the end of this year. “We want to reduce our costs through better automation,” says Mike Longo, director of information services for the Department of Revenue. “Paper handling is a problem.” Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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onnecticut is America’s richest state by most measures, but despite its affluence — or perhaps because of it — the state struggled for decades to balance its books without an income tax. Until 1991, it taxed dividends and interest but not general personal income. Then, confronted by a $1 billion gap in the early 1990s, state officials found that increasing the 8 percent sales tax or the astronomical 13.8 percent corporate income tax would be even less desirable than going after personal income. In what many recall as the state’s toughest political battle, Governor Lowell Weicker pushed through a personal income tax with a flat rate of 4.5 percent, simultaneously reducing the sales tax to 6 percent and eliminating the tax on dividends and interest.