TAXES - INCOME;
April 2, 2003 |
2003-R-0348 | |
PRELIMINARY ANALYSIS AND FISCAL IMPACT FOR LCO 4677 “PIGGYBACK” INCOME TAX BILL | ||
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By: Judith Lohman, Chief Analyst Rob Wysock, Principal Economic Analyst Felix Planas, Principal Economic Analyst | ||
You asked for a preliminary bill analysis and fiscal note for LCO 4677, “An Act Concerning a Personal Income Tax Based on Federal Tax Liability,” also known as the “piggyback” income tax proposal.
SUMMARY
Fiscal Impact
The table below presents the FY 2004 and FY 2005 General Fund impact of the bill.
FY 04 |
FY 05 | |
(in millions) | ||
Revenue Gain |
$ 466. 7* (18 months of revenue) |
$ 300. 0 (12 months of revenue) |
*Assumes an implementation date of July 1, 2004. Therefore, DRS will issue new withholding tables in July that will take into account the impact of the tax change in effect for the entire 2003-income year. | ||
Bill Summary
Starting with tax years beginning January 1, 2003, the bill changes taxable income for purposes of the state income tax from Connecticut adjusted gross income (AGI) minus applicable exemptions to federal tax liability. It eliminates the current 3% and 5% tax rates on Connecticut taxable income and establishes a new tax rate of 33%. Because the bill bases the state income tax on federal tax liability, including all federal exemptions and deductions, it eliminates the current state personal income tax exemptions.
The bill retains most of the current Connecticut modifications to income but requires them to be applied to federal tax liability rather than federal AGI.
The bill revamps the personal income tax credits by replacing the current range of 27 credits for up to 75% of the tax due with six possible credits for up to 100% of the tax. As is the case under current law, the bill’s credits phase out at higher incomes. The bill’s credits offset all tax liability for those with Connecticut taxable incomes under $ 5,000 for single and married separate filers, under $ 6,000 for heads of household, and under $ 10,000 for joint filers.
The bill retains a credit for property taxes but reduces the maximum credit from $ 500 to $ 200. As under current law, the bill’s credit phases down for higher incomes. But the bill phases out the credit completely instead of retaining a minimum $ 100 credit for all taxpayers as the current law does.
Finally, the bill makes conforming changes to replace Connecticut AGI with Connecticut taxable income in the tax calculations required for nonresidents and part-year residents.
A section-by-section analysis follows.
SEC. 1 – TAX RATE AND BASE
The bill bases Connecticut’s income tax on federal taxable income. Under the bill, if a taxpayer’s Connecticut taxable income is the same as his federal taxable income, his Connecticut tax is 33% of the total tax due as reported on his federal income tax return (Line 61 on the 2002 Form 1040). If a taxpayer’s Connecticut taxable income is different from his federal taxable income, his Connecticut tax is 33% of (1) the federal income tax on the amount of his Connecticut taxable income plus (2) any tax liability other than for federal income tax that he must report on his federal return.
In addition to federal income tax liability, taxpayers must report liability for the following on their federal income tax returns:
1. self-employment tax,
2. Social Security and Medicare tax on tip income not reported to an employer,
3. tax on qualified plans, including IRAs and other tax-favored accounts,
4. advance earned income tax credit payments, and
5. household employment taxes.
EFFECTIVE DATE: Upon passage and applicable to tax years starting on or after January 1, 2003.
SEC. 2 – MODIFICATIONS TO CONNECTICUT TAXABLE INCOME
As under current law, the bill requires a taxpayer to make certain modifications to his income when calculating his state taxable income. Under current law, the starting point for Connecticut modifications is federal AGI and the end result is Connecticut AGI. Under this bill, the starting point is federal taxable income and the end result is Connecticut taxable income. The bill’s modifications are shown in Table 1. All of the modifications listed are also required under current law.
TABLE 1: PROPOSED TAXABLE INCOME MODIFICATIONS
ADDITIONS |
DEDUCTIONS |
§ Interest on non-Connecticut state and local government obligations not includable in federal AGI, unless state taxation is prohibited § Exempt-interest dividends from a mutual fund derived from above § Federal-tax-exempt interest or dividends on federal government obligations not exempt from state taxation § Capital losses on sales or exchanges of Connecticut state or local government bonds § Connecticut income tax deducted on federal return to arrive at federal AGI § Interest on any indebtedness incurred to purchase or carry investments whose income is exempt from Connecticut income tax, if included in federal AGI § Expenses paid or incurred for production or collection of income or management or maintenance of property exempt from Connecticut income tax that were deducted to arrive at federal AGI § Amortizable bond premiums producing interest income exempt from Connecticut income tax, if the premiums were deducted to arrive at federal AGI § For income tax years starting January 1, 2002, the federally deductible bonus depreciation allowance on certain property acquired between September 10, 2001 and September 10, 2004 and placed in service before January 1, 2005 |
§ Income exempted from state taxation by federal law (including income from U. S. Treasury bonds, notes, bills, and certificates, and U. S. savings bond interest) § Exempt dividends paid by a regulated investment company § State tax refunds included in federal AGI § Tier I railroad retirement benefits § Interest income from Connecticut state and local government obligations § Capital gains on sales of Connecticut state or local government bonds § Interest paid on indebtedness incurred or continued to acquire investments that provide Connecticut taxable but federal tax-exempt income, if not deductible in determining federal AGI and attributable to the taxpayer’s trade or business § Expenses paid or incurred for production or collection of income or management or maintenance of property producing Connecticut taxable income that were not deducted to arrive at federal AGI and are attributable to the taxpayer’s trade or business § Amortizable bond premiums producing interest or Connecticut taxable income, if the premiums are not deductible to determine federal AGI and are attributable to the taxpayer’s trade or business § State income tax rebates § Federally taxable distributions received as a designated beneficiary from the Connecticut Higher Education Trust § Qualifying, federally taxable, Holocaust settlement payments § Federally taxable interest earned on funds deposited in a Connecticut individual development account |
The bill eliminates:
1. a required addition to Connecticut AGI for taxable lump-sum distributions not included in federal AGI,
2. a deduction for pro rata shares of certain S corporation income (the deduction applies only to shareholders of S corporations that were subject to state corporation tax in 2000 and that have a federal taxable year other than a calendar year),
3. a deduction for 100% of federally taxable Social Security income, if the taxpayer’s federal AGI is less than $ 50,000 for single filers and married people filing separately or $ 60,000 for joint filers, and
4. a partial deduction for federally taxable Social Security income for taxpayers with higher federal AGIs.
EFFECTIVE DATE: Upon passage and applicable to tax years starting on or after January 1, 2003.
SEC. 3 – PERSONAL CREDITS
Starting with the 2003 tax year, the bill replaces the current range of credits toward state income tax due based on Connecticut AGI, with new credits based on Connecticut taxable income. Under current law, taxpayers are eligible for a percentage credit of their tax due, depending on Connecticut AGI and filing status. The current law has 27 possible credits ranging from 1% to 75%, with credits decreasing at higher incomes. Taxpayers with Connecticut AGIs over certain levels, which vary according to filing status, receive no credits.
The bill instead allows six income-related percentage credits ranging from 16. 7% to 100% of the tax due. The bill’s credits offset all tax liability for those with Connecticut taxable incomes under $ 5,000 for single and married separate filers, under $ 6,000 for heads of household, and under $ 10,000 for joint filers.
Table 2 shows income levels for maximum credits and the credit phase-out thresholds for each filing status under the current law. (Because of personal exemptions, those with Connecticut AGIs below the minimum levels shown below pay no Connecticut income tax. )
TABLE 2: CURRENT PERSONAL INCOME TAX CREDITS
FILING STATUS |
CONNECTICUT AGI | |
Maximum (75%) Credit |
No Credit | |
Married, Filing Separately |
$ 12,000-$ 15,000 |
Over $ 52,500 |
Single (through 1/1/04) |
$ 12,500 -$ 15,600 |
Over $ 54,500 |
Head of Household |
$ 19,000-$ 24,000 |
Over $ 78,500 |
Married Filing Jointly |
$ 24,000-$ 30,000 |
Over $ 100,500 |
The bill’s credits are shown in Table 3.
TABLE 3: PROPOSED PERSONAL INCOME TAX CREDITS
CREDIT |
CONNECTICUT TAXABLE INCOME | ||
Single or Married Filing Separately |
Head of Household |
Married Filing Jointly | |
100% |
Under $ 5,000 |
Under $ 6,000 |
Under $ 10,000 |
83. 3% |
5,000-8,999 |
6,000-13,999 |
10,000-17,999 |
66. 7% |
9,000-12,999 |
14,000-21,999 |
18,000-25,999 |
50% |
13,000-16,999 |
22,000-29,999 |
26,000-33,999 |
33. 3% |
17,000-20,999 |
30,000-37,999 |
34,000-41,999 |
16. 7% |
21,000-24,999 |
38,000-45,999 |
42,000-49,999 |
0 |
$ 25,000 and over |
$ 46,000 and over |
$ 50,000 and over |
EFFECTIVE DATE: Upon passage and applicable to tax years starting on or after January 1, 2003.
SEC. 4 – PROPERTY TAX CREDIT
The bill reduces the maximum property tax credit against the income tax from $ 500 to $ 200. Under current law, the first $ 400 of the maximum credit is reduced by 10% for each $ 10,000 of a taxpayer’s Connecticut AGI (10% for each $ 5,000 for married people filing separately) above specified levels. The bill maintains the 10% phase-out for each $ 10,000 over specified income levels but establishes the levels based on Connecticut taxable income.
The bill also (1) phases out the entire credit, (2) makes the phase-out schedule the same for married people filing separately as for other filers, that is, phasing out 10% of the credit for each additional $ 10,000 of income rather than each additional $ 5,000, and (3) eliminates scheduled annual increases in the phase-out threshold for single filers for tax years starting January 1, 2004 through January 1, 2009.
Table 4 shows the current property tax credit phase-out, which is based on Connecticut AGI.
TABLE 4: CURRENT PROPERTY TAX CREDIT PHASE-OUT
MAXIMUM CREDIT |
CONNECTICUT ADJUSTED GROSS INCOME | |||||||
Married Filing Jointly |
Married Filing Separately |
Head Of Household |
Single | |||||
From |
To |
From |
To |
From |
To |
From |
To | |
$ 500 |
$ 24,001 |
$ 100,500 |
$ 12,001 |
$ 50,250 |
$ 19,001 |
$ 78,500 |
$ 12,501 |
$ 54,500 |
460 |
100,501 |
110,500 |
50,251 |
55,250 |
78,501 |
88,500 |
54,501 |
64,500 |
420 |
110,501 |
120,500 |
55,251 |
60,250 |
88,501 |
98,500 |
64,501 |
74,500 |
380 |
120,501 |
130,500 |
60,251 |
65,250 |
98,501 |
108,500 |
74,501 |
84,500 |
340 |
130,501 |
140,500 |
65,251 |
70,250 |
108,501 |
118,500 |
84,501 |
94,500 |
300 |
140,501 |
150,500 |
70,251 |
75,250 |
118,501 |
128,500 |
94,501 |
104,500 |
260 |
150,501 |
160,500 |
75,251 |
80,250 |
128,501 |
138,500 |
104,501 |
114,500 |
220 |
160,501 |
170,500 |
80,251 |
85,250 |
138,501 |
148,500 |
114,501 |
124,500 |
180 |
170,501 |
180,500 |
85,251 |
90,250 |
148,501 |
158,500 |
124,501 |
134,500 |
140 |
180,501 |
190,500 |
90,251 |
95,250 |
158,501 |
168,500 |
134,501 |
144,500 |
100 |
Over $ 190,500 |
Over $ 95,250 |
Over $ 168,500 |
Over $ 144,500 | ||||
Table 5 shows the proposed phase-out under the bill. Under the bill the phase-out is based on Connecticut taxable income.
TABLE 5: PROPOSED PROPERTY TAX CREDIT PHASE OUT
MAXIMUM CREDIT |
CONNECTICUT TAXABLE INCOME | |||||
Married Filing Jointly |
Single or Married Filing Separately |
Head Of Household | ||||
From |
To |
From |
To |
From |
To | |
$ 200 |
$ 50,000 and under |
$ 25,000 and under |
$ 46,000 and under | |||
180 |
50,001 |
60,000 |
25,001 |
35,000 |
46,001 |
56,000 |
160 |
60,001 |
70,000 |
35,001 |
45,000 |
56,001 |
66,000 |
140 |
70,001 |
80,000 |
45,001 |
55,000 |
66,001 |
76,000 |
120 |
80,001 |
90,000 |
55,001 |
65,000 |
76,001 |
86,000 |
100 |
90,001 |
100,000 |
65,001 |
75,000 |
86,001 |
96,000 |
80 |
100,001 |
110,000 |
75,001 |
85,000 |
96,001 |
106,000 |
60 |
110,001 |
120,000 |
85,001 |
95,000 |
106,001 |
116,000 |
40 |
120,001 |
130,000 |
95,001 |
105,000 |
116,001 |
126,000 |
20 |
130,001 |
140,000 |
105,001 |
110,000 |
126,001 |
136,000 |
No credit |
Over $ 140,000 |
Over $ 110,000 |
Over $ 136,000 | |||
EFFECTIVE DATE: Upon passage and applicable to tax years starting on or after January 1, 2003.
SEC. 5 – NONRESIDENT AND PART-YEAR RESIDENTS
The bill requires nonresidents and part-year residents to determine their Connecticut tax liability based on the amount of taxable income, rather than the AGI, that is derived from or connected to sources in this state. Except for the change in the income base, all other required calculations remain the same.
The bill also makes technical changes to conform to its elimination of current personal exemptions and credits.
EFFECTIVE DATE: Upon passage and applicable to tax years starting on or after January 1, 2003.
SECS. 6-9 – REPEALED PROVISIONS
Exemptions (Sec. 9)
The bill eliminates the income exemptions that, under current law, are subtracted from Connecticut AGI to yield taxable income. 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.
EFFECTIVE DATE: Upon passage
Personal Credits (Sec. 9)
As described above (see Sec. 3), the bill eliminates the current law’s personal credits for from 1% to 75% of tax due, based on a taxpayer’s Connecticut AGI.
EFFECTIVE DATE: Upon passage
Conforming Changes (Secs. 6-8)
The bill eliminates statutory references to the repealed exemptions and credits.
EFFECTIVE DATE: July 1, 2003 and applicable to tax years starting on or after January 1, 2003.