You asked for a preliminary summary of SB 800, An Act Concerning Revenue Increases for the Governor's Balanced Budget Plan, introduced at the governor's request.

SUMMARY

This bill:

1. increases the income tax rate on Connecticut taxable income over $ 1 million from 4. 5% to 5. 5%;

2. extends the phase-out of the property tax credit against the income tax that already applies at higher incomes to the entire $ 500 credit instead of only the first $ 400;

3. increases the sales and use tax on computer and data processing service from 1% to 3% and makes the tax permanent;

4. extends the sales tax to clothing and footwear costing between $ 50 and $ 74. 99;

5. retroactively exempts certain food services furnished by state-operated acute care hospitals from the sales tax;

6. increases the cigarette tax by 40 cents per pack, from $ 1. 11 to $ 1. 51;

7. increases the real estate conveyance tax on residential properties sold for $ 300,000 or more and doubles the tax on nonresidential property sales; and

8. suspends petroleum products gross earnings tax revenue transfers to the Special Transportation Fund (STF) for FY 2002-03.

The bill takes effect on various dates as noted below.

INCOME TAX

Increased Tax on Income Over $ 1 Million (Secs. 1 & 2)

The bill increases the income tax rate on annual Connecticut taxable income over $ 1 million from 4. 5% to 5. 5%. Currently, the Connecticut income tax has two brackets, with the first $ 10,000 of taxable income for single filers and married couples filing separately, the first $ 16,000 for heads of household, and the first $ 20,000 for joint filers taxed at 3. 0% and all taxable income above those levels at 4. 5%. This bill would create a third tax bracket for taxable income over $ 1 million and impose a new 5. 5% tax rate on that income.

The bill makes a corresponding increase in income tax rates on trusts and estates. Under current law, trusts and estates pay a flat 4. 5% tax on all their Connecticut taxable income. The bill retains the 4. 5% rate for trust and estate income of $ 1 million or less but creates a new bracket and a higher 5. 5% rate for income over $ 1 million.

The bill requires husbands and wives with combined Connecticut taxable income over $ 1 million to file a joint Connecticut tax return if they are eligible to file a joint federal return. Under current law, husbands and wives, regardless of income, may file separate returns in Connecticut if they choose to file separate federal returns. Under the bill, as under current law, joint state returns are not required for married couples if only one spouse is a state resident or if both spouses are nonresidents and only one has Connecticut taxable income.

Finally, the bill requires taxpayers affected by the increased rates to adjust their estimated tax payments in the current year to include any changes in tax rates that apply to that year. Thus, under the bill, the new 5. 5% tax rate on incomes over $ 1 million, which takes effect for income years starting January 1, 2003, must be reflected in quarterly estimated tax payments made during 2003. Under current law, taxpayers required to pay estimated taxes must pay no more than 100% of the tax shown on their previous year's return.

Effective Date: Upon passage and applicable to tax years starting on or after January 1, 2003.

Property Tax Credit Phase-Out (Sec. 3)

The bill changes the property tax credit phase-out for people with incomes over specified amounts. Under both current law and the bill, the maximum property tax credit against the income tax is reduced by 10% for each $ 10,000 of a taxpayer's income above specified levels, which vary depending on filing status. Under current law, the phased 10% reductions apply only to the first $ 400 of the maximum $ 500 credit, leaving a residual credit of $ 100 available regardless of income. By applying the phase-out to the full $ 500 credit, the bill both increases the credit reduction at each step of the phase-out from $ 40 to $ 50 and eliminates the residual $ 100 credit, as shown in Table 1.

Table 1: Current and Proposed Property Tax Credit Phase-Out

(The singles income levels shown in Table 1 apply through January 1, 2004. After that date, under both current law and the bill, the income threshold for starting the credit phase-out for single filers increases by $ 1,000 per year, reaching $ 64,500 in 2009. )

The change in the credit is retroactive to the 2002 tax year.

Effective Date: Upon passage and applicable to tax years starting on or after January 1, 2002.

SALES AND USE TAX

Computer and Data Processing Service (Secs. 4 & 5)

The bill increases the sales and use taxes on computer and data processing services from 1% to 3%, starting February 1, 2003. It also repeals the final step of a scheduled phase-out of the taxes on such services currently set to take effect July 1, 2004, thus making the new rate permanent.

Effective Date: Upon passage and applicable to sales occurring on or after February 1, 2003.

Exemption for Clothing and Footwear (Sec. 6)

Starting February 1, 2003, the bill limits the clothing and footwear that is exempt from the state's 6% sales tax to items costing less than $ 50 rather than those costing less than $ 75.

Effective Date: Upon passage and applicable to sales occurring on or after February 1, 2003.

Exemption for Certain Hospital Food Services (Sec. 7)

By law, the 6% sales tax applies to charges for furnishing, preparing, or serving food, meals, or drinks. This bill retroactively exempts from the tax any such food services furnished between April 1, 1994 and December 30, 1999 by short-term acute care hospitals operated exclusively by the state. The exemption does not apply to hospitals the state operated as a receiver.

Effective Date: Upon passage

CIGARETTE TAX (SECS. 8-10)

The bill increases the cigarette tax by 40 cents per pack, from $ 1. 11 to $ 1. 51 per pack of 20 (55. 5 to 75. 5 mills per cigarette), starting February 5, 2003.

The bill also imposes a 40-cent tax on each pack of cigarettes (20 mills on each cigarette) that dealers and distributors have in their inventories at the later of the close of business or 11: 59 p. m. on February 4, 2003. By March 1, 2003, each dealer and distributor must report to the Department of Revenue Services the number of cigarettes in inventory as of that time and date. Failure to file the report by the due date is grounds for the department to revoke a dealer's or distributor's license. Filing an incorrect report subjects a dealer or distributor to a fine of up to $ 5,000, between one and five years in prison, or both.

Effective Date: Upon passage

REAL ESTATE CONVEYANCE TAX (SEC. 11)

The bill increases the real estate conveyance tax on sales of nonresidential property from 1% to 2% of the total sale price. As under current law, the tax does not apply to sales of unimproved land or to property sold for $ 2,000 or less.

For residential property sold for $ 300,000 or more, the bill doubles the tax rates on the $ 300,000-plus portion of the sale price as shown in Table 2. The tax rate on any part of the sale price under $ 300,000 remains unchanged.

Table 2: Real Estate Conveyance Tax on Residential Property

Under the bill, if a residential estate is conveyed to a purchaser, or to someone else at the purchaser's direction, through multiple deeds or other instruments, the price for conveying each deed must be added together to determine the property's total sale price. The real estate conveyance tax applicable to that total price must then be used to figure the required tax on each conveyance.

Effective Date: February 1, 2003

PETROLEUM PRODUCTS GROSS EARNINGS TAX REVENUE (SEC. 12)

For FY 2002-03, the bill suspends transfers of petroleum products gross earnings tax revenue derived from motor fuel sales to the Special Transportation Fund (STF). Current law requires the commissioner of revenue services to transfer $ 11. 5 million of such revenue to the STF every quarter.

Effective Date: Upon passage

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