BUDGET, STATE;

You asked for a preliminary analysis and fiscal impact statement for SB 1160, “An Act Concerning Revenue Adjustments,” raised by the Finance, Revenue and Bonding Committee.

SUMMARY

Fiscal Impact

The table below presents the FY 2004 and FY 2005 General Fund impact of the bill.

Bill Summary

The bill:

1. adds two upper-income brackets to the state income tax and increases the tax rates on income in those brackets from 5% to 5. 25% and 5. 5%;

2. increases the state’s 6% sales and use tax rate to 6. 5%;

3. imposes surcharges of 10% for 2004 and 5% for 2005 on (a) the corporation tax, (b) the tax on limited liability companies (LLCs), limited liability partnerships (LLPs), limited partnerships (LPs), and S corporations, and (c) the insurance premium tax;

4. extends the 5% gross earnings tax on cable television companies to satellite t. v. services;

5. increases taxes on tobacco products other than cigarettes;

6. decouples the state’s generation-skipping transfer and estate taxes from the corresponding federal taxes and bases the state taxes on the federal law in effect on January 1, 2001;

7. dedicates $ 10. 5 million in petroleum product gross earnings tax revenue to the Emergency Spill Response Fund for FYs 2003-04 and 2004-05;

8. transfers specified amounts to the General Fund from various quasi-public authorities and other funds for FYs 2003-04 and 2004-05;

9. requires the Department of Economic and Community Development (DECD) and the Connecticut Housing Finance Authority (CHFA) to plan for and undertake to transfer DECD’s housing programs to CHFA; and

10. makes changes in the Capital Equipment Purchase Fund and in certain funds related to the operation of the UConn Stadium at Rentschler Field.

A section-by-section analysis and fiscal impact appears below.

SECS. 1 & 2 – GROSS EARNINGS TAX ON SATELLITE T. V. SERVICES

Fiscal Impact

Bill Analysis

The bill imposes a 5% tax on gross earnings from businesses providing one-way transmission of video programming to Connecticut subscribers by satellite. The tax already applies to cable television, railroad express, and telegraph and cable companies. The bill requires each satellite t. v. service’s taxable gross earnings to be apportioned to Connecticut based on the proportion of its number of Connecticut subscribers on the first and last day of each tax year to its total number of subscribers. It requires services to report their total number of subscribers and their Connecticut subscribers to the Department of Revenue Services (DRS) on their tax returns, which must be filed every year by April 1.

EFFECTIVE DATE: July 1, 2003 and applicable to gross earnings on sales starting on or after that date.

SECS. 3-5 – CORPORATION AND OTHER BUSINESS TAX SURCHARGES

Fiscal Impact

Bill Analysis

For tax years 2004 and 2005, the bill imposes a 10% surcharge and a 5% surcharge, respectively, on the corporation tax and the annual tax on LLCs, LLPs, LPs, and S corporations. The surcharge is due, payable, and collectible as part of each company’s total tax for the year.

Companies subject to the corporation tax must calculate their surcharges based on their tax liability excluding credits. The surcharge applies whether a corporation uses the net income or the alternative capital base method to calculate its corporation tax.

Corporations, LLCs, LLPs, LPs, and S corporations are already subject to a 20% tax surcharge for the 2003 tax year.

EFFECTIVE DATE: Upon passage and applicable to income and taxable years starting on or after July 1, 2004.

SECS. 6-8 - GENERATION-SKIPPING TRANSFER AND ESTATE TAXES

Fiscal Impact

Bill Analysis

The bill decouples the state generation-skipping transfer and estate taxes from the federal ones by setting the state tax rates at the amount of the federal credit for such state taxes as of January 1, 2001, rather than that allowable as of the date of the transfer or death. It also fixes the value of property subject to the taxes at that allowed under the federal tax law in effect as of January 1, 2001. Under current law, the state taxes are linked to the corresponding federal taxes in effect on the transfer or death date, and the state tax rates are set to absorb the maximum amount of the federal credit at the time of the transfer or death.

Connecticut’s generation-skipping transfer tax applies to transfers to beneficiaries more than one generation below that of the transferor, whether made directly or through a trust or similar arrangement. Connecticut’s tax applies to every such transfer when the original transferor is a state resident on the date of the original transfer or the transfer includes real or tangible personal property located in Connecticut.

Connecticut currently levies an estate tax when the total federal estate tax credit for state taxes exceeds the Connecticut inheritance tax paid. The 2001 federal tax relief act phases out the federal credit for state taxes from 2002 through 2005 at the rate of 25% per year, thereby eliminating the basis of the current Connecticut estate tax. The federal law replaces the estate tax credit after 2005 with a federal estate tax deduction for state taxes paid and eliminates both the federal estate and generation-skipping transfer taxes entirely as of January 1, 2010.

EFFECTIVE DATE: Upon passage and applicable to transfers and the estates of people who die on or after January 1, 2003.

SECS. 9 & 10 – INSURANCE PREMIUM TAX SURCHARGES

Fiscal Impact

Bill Analysis

For tax years 2004 and 2005, the bill imposes a 10% surcharge and a 5% surcharge, respectively, on the tax on net direct premiums of domestic and out-of-state and foreign insurance companies doing business in Connecticut. The surcharge is due, payable, and collectible as part of each company’s total tax for the year. Companies must calculate their surcharges based on their tax liability excluding credits.

EFFECTIVE DATE: July 1, 2003 and applicable to premiums received on or after that date.

SECS. 11-13 – SALES AND USE TAX INCREASE

Fiscal Impact

Bill Analysis

The bill increases the state’s 6% sales and use tax rate to 6. 5%.

EFFECTIVE DATE: July 1, 2003

SEC. 14 – CAPITAL EQUIPMENT PURCHASE FUND

Fiscal Impact

No fiscal impact. Section 14 eliminates language that was enacted in 1992 to implement a $ 3 million efficiency improvement and cost reduction program. The State Bond Commission allocated the funds in May 1993, the bonds were issued in 1995 and then subsequently paid off in 1998.

Bill Analysis

The bill eliminates the following funding allocations from the Capital Equipment Purchase Fund:

1. up to $ 2. 9 million for capital investments to achieve state agency efficiency improvements and cost reductions through such things as new technologies, improved equipment, and energy efficiency measures, and

2. up to $ 100,000 for awards to state employees for innovative ideas to improve service delivery or reduce costs.

EFFECTIVE DATE: Upon passage

SEC. 15 – UCONN STADIUM OPERATING AND CAPITAL FUNDS

Stadium Facility Enterprise Fund

Fiscal Impact

No fiscal impact. Section 15 clarifies statutory provisions that set up operating and revenue accounts related to the operation and management of the UConn Stadium at Rentschler Field and permit the Office of Policy and Management (OPM) to contract with a private entity to manage the stadium’s operations. The changes are being made at the request of the Office of the State Comptroller.

Bill Analysis

Under current law, the OPM secretary must deposit all revenues from the use, operation, or management of the UConn Stadium at Rentschler Field into a nonlapsing Stadium Facility Enterprise Fund. The fund must have a capital replacement reserve subaccount into which the OPM secretary must transfer, at the end of each fiscal year, any enterprise fund surplus not needed for deferred maintenance, repairs, furnishings, or working capital.

This bill also requires the secretary to place in the capital reserve subaccount any General Fund appropriations or other federal, state, municipal, or private funds provided for stadium facility capital additions or replacement. As under current law, the deposit requirements exclude United Technologies Corporation funds for traffic and road improvements.

The bill requires any investment earnings on money in the Stadium Facility Enterprise Fund to be kept in the fund and used for its purposes.

Additional Operating Accounts and Subaccounts

The bill allows the OPM secretary, either on his own or by agreement with the stadium manager, to establish the following accounts at one or more banks in Connecticut to facilitate day-to-day stadium operations: (1) a box office account, (2) a revenue account, and (3) an operating expense account.

The box office account receives and holds ticket receipts until an event occurs and is reconciled. The bill allows receipts from the account to be disbursed according to standard industry practices.

The revenue account collects stadium revenue daily. The bill allows the secretary to establish subaccounts within the revenue and operating expense accounts if appropriate to keep and account separately for revenues and expenses from parking, catering, concessions, or other ancillary activities. The bill allows the secretary to transfer money from the revenue to the operating account as needed and allows the stadium manager to pay stadium operating expenses directly from the operating account.

If the aggregate balance in the revenue and operating accounts at the end of the month exceeds the stadium’s projected operating expenses for the next three months, the bill requires the secretary to “promptly” transfer the excess to the Stadium Facility Enterprise Fund.

The bill also allows the secretary to direct that money in the box office, revenue, and operating accounts be temporarily invested and that investment returns be treated as revenues from stadium operations.

EFFECTIVE DATE: July 1, 2003

SEC. 16 – EMERGENCY SPILL RESPONSE ACCOUNT REVENUES

Fiscal Impact

Bill Analysis

For FYs 2004 and 2005, the bill requires the comptroller to deposit $ 10. 5 million of the revenues from the petroleum products gross earnings tax into the Department of Environmental Protection’s Emergency Spill Response Account.

EFFECTIVE DATE: July 1, 2003

SEC. 17 – TRANSFERS FROM FUNDS AND QUASI-PUBLIC AUTHORITIES

Fiscal Impact

Bill Analysis

The bill transfers the following amounts to the General Fund for FYs 2004 and 2005:

1. $ 40 million from the Connecticut Housing Finance Authority (CHFA),

2. $ 5 million from Connecticut Innovations, Inc. ,

3. $ 5 million from the Connecticut Development Authority,

4. $ 72 million from the Energy Conservation and Load Management Fund, and

5. $ 25 million from the Clean Energy Fund.

The bill also requires the DECD commissioner and CHFA’s executive director, in consultation with the OPM secretary, to develop a plan to transfer DECD’s housing programs to CHFA. The plan must detail the General Fund savings resulting from such a transfer. By January 1, 2004, DECD and CHFA must conclude a memorandum of understanding specifying the programs and responsibilities to be transferred, the timing, and any other matters needed to complete the transfer. Any savings must be deducted from the $ 40 million the bill transfers from CHFA to the General Fund.

EFFECTIVE DATE: July 1, 2003

SEC. 18 – TOBACCO PRODUCTS TAX INCREASE

Fiscal Impact

Bill Analysis

The bill increases the tax on tobacco products, other than cigarettes and snuff tobacco, from 20% to 27% of the wholesale price. It increases the tax on snuff tobacco from 40 cents to 55 cents per ounce.

The tobacco products tax applies to cigars, cheroots, pipe tobacco, and similar products.

EFFECTIVE DATE: July 1, 2003 and applicable to sales on or after that date.

SEC. 19 – INCOME TAX RATE INCREASE AND NEW BRACKETS

Fiscal Impact

Bill Analysis

The bill increases the number of personal income tax brackets from two to four by adding two new brackets for taxable incomes over $ 500,000 for joint filers; $ 265,500 for single filers; $ 250,000 for married people filing separately, and $ 396,000 for heads of household. It increases the tax rate on these higher income brackets from a flat 5. 0% to 5. 25% and 5. 5%.

The bill also eliminates the flat 5% income tax rate on trusts and estates and instead subjects their taxable income to the same tax rates as apply to single filers. Finally, the bill establishes new tax brackets for married people filing separately instead of applying the singles’ brackets to such filers. The bill sets income levels for each tax bracket for married separate filers at 50% of the income levels applicable to the comparable bracket for joint filers.

Tax rates and brackets under the current law and the bill are shown in Table 1. Each tax rate shown applies only to the taxable income that falls within the corresponding income bracket and not to a taxpayer’s taxable income above or below the bracket. The current and proposed rates shown apply to taxable income, which is Connecticut adjusted gross income (AGI) minus exemptions. For 2003, the maximum exemptions are $ 12,000 for married people filing separately, $ 12,500 for singles, $ 19,000 for heads of household, and $ 24,000 for married couples. Exemptions are phased out at higher incomes. Taxpayers with Connecticut AGIs above $ 71,000 for joint filers, $ 56,000 for heads of household, $ 36,000 for singles, and $ 35,000 for married separate filers receive no exemptions.

TABLE 1: CURRENT AND PROPOSED (FOR 2003 AND AFTER) TAX RATES AND BRACKETS

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

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