sSB-1321

AN ACT CONCERNING VARIOUS TAXES AND OTHER PROVISIONS RELATED TO REVENUES OF THE STATE.

State Impact:

Note: GF=General Fund; BF=Banking Fund; IF=Insurance Fund

Municipal Impact: None

OFA Fiscal Impact:

The bill is anticipated to result in a net (gains less losses) General Fund revenue gain of $ 551. 5 million in FY 06 and $ 662. 7 million in FY 07.

The bill will result in a one-time revenue loss of $ 20. 0 million to the Banking Fund in FY 07.

The bill will result in a one-time revenue loss of $ 5. 0 million to the Insurance Fund in FY 07.

OLR Summary:

This bill increases the income tax by adding four tax brackets affecting those with taxable incomes over $ 500,000 for joint filers, $ 265,000 for single filers, $ 396,000 for heads of household, and $ 250,000 for married people filing separately. It increases the tax rates on these higher-income brackets. The new rates range from 5. 75% to 6. 5% for 2005 and 6. 0% to 6. 75% for 2006 and subsequent tax years (§§ 9-12). The current rate for these income levels is a flat 5. 0%.

The bill eliminates the succession tax and the tax on gifts under $ 1 million as of January 1, 2005 instead of over several more years as required by current law. It replaces these taxes with a uniform tax on transfers of Connecticut taxable gifts and estates that exceed a combined lifetime total of $ 1 million (§§ 4-8 & 23).

The bill imposes corporation tax surcharges for the 2005 through 2007 income years. The surcharges are 10% for 2005 and 15% for 2006 and 2007. The surcharge for 2004 was 25% (§§ 2 & 3).

The bill also:

1. delays scheduled income tax reductions for single filers for an additional two years (§§ 16-18);

2. exempts 50% of federally taxable military retirement income from the state income tax starting in 2008 (§§ 13-15);

3. extends the deadline for the state to issue up to $ 60 million in abandoned property revenue bonds for two years, until June 30, 2007 (§ 1);

4. transfers various sums from the Banking and Insurance Funds and from FY 06 General Fund revenue to the General Fund for FY 07 (§§ 20-22); and

5. revamps the existing corporation tax credit review committee and its membership and requires it to study USE OF unitary filing systems and multifactor apportionment formulas for the corporation tax (§19).

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

EFFECTIVE DATE: Various, see below.

OFA Fiscal Impact:

Presently, it is assumed that the amount of bonds that will be issued will yield the General Fund $ 40 million in revenue in FY 07.

OLR Analysis:

The bill extends by two years the deadline for the State Bond Commission to issue up to $ 60 million in special obligation abandoned property fund bonds. Under current law, the bond commission must authorize the bonds by June 30, 2005. The bill gives it until June 30, 2007.

Bonds are backed by revenue from disposal of abandoned property the state takes. By law, bond proceeds must go into the General Fund to support state programs. The maximum bond term is seven years.

EFFECTIVE DATE: Upon passage

OFA Fiscal Impact:

The bill is anticipated to result in a General Fund gain of $ 62. 0 million in FY 06, $ 47. 0 million in FY 07, and $ 16 million in FY 08.

OLR Analysis:

For the 2005, 2006, and 2007 income years, the bill imposes corporation tax surcharges of 10%, 15%, and 15%, respectively. The surcharges apply to all companies that pay the tax based on net income, even if they owe only the $ 250 minimum tax. But the bill applies the surcharges to companies that pay the alternative tax on their capital base (see BACKGROUND) only if their tax liability is greater than the $ 250 minimum tax.

Under the bill, a corporation must calculate its surcharge based on its tax liability before any tax credits. The surcharge is due, payable, and collectible as part of the company’s total tax for the year.

EFFECTIVE DATE: Upon passage and applicable to income years starting on or after January 1, 2005.

OFA Fiscal Impact:

The bill is anticipated to result in a net General Fund revenue gain (gain from the unified estate and gift tax off-set by losses resulting from the repeal of the succession and gift taxes) of $ 66. 8 million in FY 06 and $ 138. 9 million in FY 07.

OLR Analysis:

Transfer Tax

The bill eliminates the succession tax and the tax on gifts under $ 1 million immediately instead of over several more years as required by current law. It eliminates the succession tax starting with deaths in 2005 instead of in 2006 for Class B heirs (collateral relatives such as siblings, nieces, and nephews) and 2008 for Class C heirs (more remote relatives and unrelated people). It eliminates the gift tax on January 1, 2005 instead of January 1, 2010.

The bill replaces these taxes with a uniform tax on transfers of Connecticut taxable gifts and estates that exceed a combined lifetime total of $ 1 million. The estate tax currently equals 100% of the maximum federal credit for state inheritance taxes paid. But a 2001 federal law phased out the federal credits, effectively eliminating Connecticut’s estate tax on January 1, 2005 (“The Economic Growth and Tax Relief Recovery Act of 2001,” P. L. 107-134).

Applicability

The bill’s transfer tax applies to:

1. estates of people who die on or after January 1, 2005 if (a) the estate’s taxable value exceeds $ 1 million and (b) the person was either a Connecticut resident when he died or owned Connecticut real or personal property;

2. federally taxable gifts (currently, gifts over $ 11,000 per year, per recipient) made on or after January 1, 2005 that, in the aggregate, exceed $ 1 million; and

3. a person’s estate, if the combined value of all his federally taxable gifts during life (after January 1, 2005) and his taxable estate exceeds $ 1 million.

Under the bill, a taxable estate is (1) a person’s gross estate minus all federally allowable deductions except the one for state death taxes paid, plus (2) (a) for a state resident, the aggregate value of all federally taxable gifts and (b) for a nonresident, the total value of such gifts of real or personal property located in Connecticut that the decedent made during his life starting, on January 1, 2005. The bill allows a person to take advantage of the optional deduction for the value of a qualifying life income interest in property passing to a surviving spouse for state tax purposes, even if he does not do so for the federal estate tax.

Tax Rates

Table 1 shows the tax rates on taxable gifts made and taxable estates of those who die after January 1, 2005. The percentage rate on each line applies only to amounts in that rate bracket, not to the entire transfer amount. Thus, for example, on a $ 1,100,000 estate, the tax would be 41% of $ 93,785 ($ 38,452) plus 5. 6% of $ 6,215 ($ 348), or $ 38,800 in total.

Table 1: Tax Rates on Taxable Gifts and Estates

The bill credits any gift taxes paid on gifts made on or after January 1, 2005 against total estate and gift tax liability.

Credits for Payments to Other States

Both current law and the bill allow a credit against Connecticut’s estate tax for similar inheritance taxes paid to any other state or the District of Columbia on property under the other states’ jurisdiction. Under both, the credit is the lesser of (1) the actual taxes paid in the other states or (2) the federal death tax credit multiplied by the percentage of the gross estate that is under the jurisdiction of other states. But because, as already described, the federal credit for state death taxes was entirely phased out on January 1, 2005 and is now zero, incorporating a zero federal credit into the calculation results in zero credit for taxes paid to other states. Thus, this bill, in effect, eliminates Connecticut’s estate tax credit for inheritance taxes paid to other states or the District of Columbia.

Resident and Nonresident Estates

The bill retains the current definitions of property in resident and nonresident estates over which Connecticut has estate tax jurisdiction. For resident estates, Connecticut’s jurisdiction extends to (1) real property in the state, (2) tangible personal property actually located here, and (3) intangible property regardless of location. For nonresident estates, Connecticut’s jurisdiction extends to the first two of these three types of property.

Other Provisions

The bill uses the federal taxable gift threshold to determine whether a gift must be counted toward the $ 1 million exclusion. Smaller gifts do not count. Currently, a gift is taxable under federal law if it exceeds $ 11,000 per recipient, per year. The bill automatically incorporates any changes in the federal gift tax threshold unless the federal gift tax is repealed entirely, in which case, the threshold in effect on the day before the repeal remains in effect for Connecticut.

As with the federal gift tax, if the federal estate tax is repealed, the bill requires the federal law in force on the previous day to remain in effect for purposes of the Connecticut’s tax.

Obsolete Section

The bill eliminates an obsolete provision stating that the purpose of Connecticut’s estate tax law is to give the state the benefit of federal estate tax credits for state death taxes paid (since eliminated as already described). The provision also requires the law to be liberally construed and gives the Department of Revenue Services (DRS) commissioner any incidental and additional powers she needs to accomplish that purpose (§23).

EFFECTIVE DATES: Upon passage and applicable to gifts made and to estates of people who die on or after January 1, 2005. The repeal of the obsolete section is effective on passage.

OFA Fiscal Impact:

The bill is anticipated to result in a General Fund revenue gain of $ 462. 5 million (18 months of collections) and $ 345. 0 million in FY 07 (12 months of collections).

OLR Analysis:

The bill increases the number of personal income tax brackets from two to six by adding four new brackets for taxable incomes over $ 500,000 for joint filers, $ 265,500 for single filers, $ 396,000 for heads of household, and $ 250,000 for married people filing separately. It increases the tax rates on these higher-income brackets from a flat 5. 0% to 5. 75% to 6. 5% for the 2005 tax year and 6% to 6. 75% for the 2006 tax year and after.

Table 2 shows tax rates and brackets under the current law and the bill. The tax rates shown apply only to the taxable income in the applicable bracket, not to all of a taxpayer’s income.

Table 2: Current And Proposed Tax Rates And Brackets

The bill creates a rate schedule for married couples filing separately instead of including them in the single filers’ schedule. It sets their tax brackets at 50% of those for married couple filing jointly. It also includes trusts and estates in the single filers’ schedule, thus making their income tax rates progressive. Under current law, all trust and estate income is taxed at a flat 5. 0%.

The bill requires DRS to issue special withholding tables by June 1, 2005 that reflect the bill’s income tax changes from January 1, 2005, and that result as far as practicable in six months’ of withholding under the new rates between March 1 and June 30, 2005. The commissioner must reissue withholding tables under the usual procedures for after June 30, 2005.

The bill requires taxpayers who must pay estimated tax through the year to adjust their June 2005 estimated tax payments for any increase that applies to them for the 2005 tax year. It also allows DRS to forgive interest and penalties for estimated tax underpayments attributable to the bill’s tax rate increases. Taxpayers must nevertheless pay the full taxes due for the year.

EFFECTIVE DATE: Upon passage. Tax rate changes apply to tax years beginning on or after January 1, 2005.

OFA Fiscal Impact:

The bill is anticipated to result in a General Find revenue loss of $ 2. 5 million beginning in FY 08.

OLR Analysis:

Starting with the 2008 tax year, the bill exempts 50% of federally taxable military retirement pay from the state income tax. The exemption applies to federal retirement pay to retired members of the U. S. Army, Navy, Air Force, Marines, Coast Guard, and Army and Air National Guard.

EFFECTIVE DATE: Upon passage and applicable to income years starting on or after January 1, 2008.

OFA Fiscal Impact:

The bill is anticipated to result in a General Fund revenue gain of $ 7. 0 million in FY 06 and $ 20. 0 million in FY 07.

OLR Analysis:

The bill delays, by two years, income tax reductions for single filers. It delays scheduled increases in (1) their adjusted gross income (AGI) exempt from the tax and (2) income thresholds for reducing their personal exemption, personal credit, and property tax credit.

The maximum personal exemption for single filers for 2004 is $ 12,625. Under current law, that maximum increased to $ 12,750 on January 1, 2005 and is scheduled to rise in five more annual steps to $ 15,000 on January 1, 2010. The bill delays the increase to $ 12,750 and each subsequent increase by two years. It also delays increases in the exemption reduction thresholds to correspond, as shown in Table 3. (The law reduces the income tax personal exemption by $ 1,000 for each $ 1,000 of AGI over a specified threshold, which varies according to filing status. )

Table 3: Scheduled Personal Exemption Increases For Single Filers

The bill also delays increases in AGI thresholds for reducing single filers’ personal and property tax credits against the income tax as shown in Table 4. (The law reduces credits by 10% for each $ 10,000 of AGI over a specified threshold, which varies according to filing status. )

Table 4: Scheduled Increases In Single Filer Personal And Property Tax Credit Reduction Thresholds

EFFECTIVE DATE: Upon passage and applicable to tax years beginning on or after January 1, 2005.

OFA Fiscal Impact:

Legislative Management will incur minimal costs for legislator mileage reimbursement for the members of the committee that are legislators. The current mileage reimbursement is 40. 5 cents per mile.

There may be some cost associated with the unitary filing and multifactor apportionment study depending on its scope.

OLR Analysis:

Committee Membership and Qualifications

The bill revamps the corporation business tax credit review committee and renames it the business tax credit review committee. Under current law, the committee is responsible for evaluating corporation business tax credits and reporting the results of its study to the Finance, Revenue and Bonding Committee every five years. This bill requires it to report annually by February 15, starting in 2006. Under current law, no members have been appointed to the committee and it has never issued a report.

The bill reduces the committee’s membership from 13 to 12 by eliminating the governor’s appointment; makes the Finance, Revenue and Bonding Committee co-chairmen the review committee’s co-chairmen; and requires its six appointed members to have specific qualifications. Under both current law and the bill, the review committee also includes the Finance Committee’s ranking members and the DRS and DECD commissioners or their designees. The bill requires the committee to meet at least twice a year.

The bill requires appointed members to have the following qualifications:

Tax Study

In addition to its current responsibility to study and evaluate existing credits against the corporation tax, the committee must study the potential effects of using unitary filing and multifactor apportionment formulas for the corporation tax (see BACKGROUND).

The committee must review other states’ experience with unitary filing and multifactor apportionment and gather information about their advantages and disadvantages. The information must include their reported impact on business and employment growth and on related economic sectors in other states. The bill requires the committee to report its findings and recommendations for further action as part of its annual reports to the Finance Committee.

EFFECTIVE DATE: July 1, 2005

OFA Fiscal Impact:

The bill will result in a General Fund revenue gain of $ 25. 0 million in FY 07. The bill will also result in a revenue loss to the Banking Fund of $ 20. 0 million in FY 07 and to the Insurance Fund of $ 5. 0 million in FY 07.

OLR Analysis:

The bill transfers $ 20 million from the Banking Fund and $ 5 million from the Insurance Fund to the General Fund for FY 07.

EFFECTIVE DATES: Upon passage

OFA Fiscal Impact:

The bill will result in a General Fund revenue loss of $ 46. 8 million in FY 06 and a General Fund revenue gain of $ 46. 8 million in FY 07.

OLR Analysis:

Before June 30, 2006, the bill requires the comptroller to transfer $ 46. 8 million in FY 06 General Fund revenue to FY 07 General Fund revenue.

EFFECTIVE DATE: Upon passage

OFA Fiscal Impact:

No fiscal impact.

OLR Analysis:

The bill repeals on obsolete section of the estate tax law as described above §§ 4-8.

EFFECTIVE DATE: Upon passage

BACKGROUND

Alternative Capital Base for Corporation Tax

The law requires nonfinancial services companies to calculate their corporation taxes based on both their net income and capital base and to pay the higher of the two. The capital base is the sum of the average value of a company’s issued and outstanding capital stock, surplus and undivided profit, and surplus reserves, less the average value of deficits and stock holdings in private corporations. The capital base tax is 3. 1 mills per dollar of capital base holdings.

Unitary Filing

Unitary filing refers to a system that would require a company with affiliates operating in both Connecticut and other states to file its corporation tax return in Connecticut as if it and all its affiliates were a single company. Connecticut does not currently require unitary filing.

Multifactor Apportionment

Multifactor apportionment formulas require companies operating in several states to apportion their net income to Connecticut for state corporation tax purposes based several aspects of their operations. For example, Connecticut requires most companies to use a three-factor formula incorporating property, payroll, and sales. Companies apportion their income to Connecticut for tax purposes based on the ratio of their operations in Connecticut compared to their total operations. But Connecticut also allows some types of companies, such as manufacturers and broadcasters, to use a single factor, which is the ratio of the company’s sales in Connecticut to its total sales.

COMMITTEE ACTION

Finance, Revenue and Bonding Committee

Joint Favorable Substitute