REPORT ON BILLS FAVORABLY REPORTED BY COMMITTEE

TITLE OF BILL:

AN ACT CONCERNING THE INCOME TAX.

SPONSORS OF BILL:

REASONS FOR BILL:

THE SUBSTITUTE BILL NOW CONTAINS: 1) SB 1321 WITH CHANGES TO THE INCOME TAX BRACKETS (SEE BELOW), 2) SB 1332, A UNIFIED ESTATE AND GIFT TAX, WITH CHANGES TO THE INCOME BRACKETS; 3) PROVISIONS FROM HB 6684, INCLUDING A CORPORATE TAX SURCHARGE, BUT WITH RATES OF 10% IN IY O5, 15% IN IY 06, AND 15% IN IY 07, A DELAY IN THE INCREASE IN THE SINGLES EXEMPTION, A TRANSFER FROM THE BANKING FUND TO THE GENERAL FUND, A TRANSFER FROM THE INSURANCE FUND TO THE GENERAL FUND, AND SECURITIZATION OF UNCLAIMED PROPERTY; 4) A TRANSFER OF RESOURCES FROM FY 06 TO FY 07; 5) AN EXEMPTION FOR 50% OF MILITARY PENSIONS, EFFECTIVE 1/1/08; AND 6) A PROVISION THAT EVALUATION OF THE COSTS AND BENEFITS OF UNITARY REPORTING AND THE SINGLE FACTOR APPORTIONMENT FORMULA BE ADDED TO THE DUTIES ASSIGNED TO THE CORPORATION BUSINESS TAX CREDIT REVIEW COMMITTEE.

Income Tax

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, and $396,000 for heads of household. It increases the tax rates on these higher-income brackets from a flat 5.0% to from 5.75% to 6.5% for the 2005 tax year and to 6% to 6.75% for the 2006 tax year and after. 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.

Estate Tax

The bill eliminates the succession tax and the tax on gifts under $1 million immediately instead of over several more years as required under current law. It eliminates the succession tax starting with deaths in 2005 instead of in 2006 for Class B, and 2008 for Class C, heirs. It eliminates the gift tax as of January 1, 2005 instead of January 1, 2010.

The bill replaces these taxes with a unified 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 credits for state inheritance taxes paid. But a 2001 federal law phased out the federal credits, thereby reducing Connecticut’s estate tax to zero as of January 1, 2005.

The bill’s unified transfer tax applies to:

Under the bill, a taxable estate is (1) a person’s gross estate minus federally allowable deductions; plus (2) for a state resident, the aggregate value of all federally taxable gifts and 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; minus (3) $60,000. The bill requires estates to be valued using federally allowable deductions, including the optional one for the value of a qualifying life income interest in property passing to a surviving spouse.

EFFECTIVE DATES: Upon passage and applicable to estates of people who die on or after January 1, 2005 and to gifts made in calendar years starting on or after that date.

Corporation Tax Surcharge

For the 2005, 2006, 2007 income years, the bill imposes surcharges on the corporation tax of 10%, 15%, and 15% respectively. The 2004 surcharge was 25% and applied to any corporation with a 2004 tax liability greater than the $250 minimum tax. As was the case for surcharges in past years, the bill requires a corporation to calculate its surcharge based on 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: July 1, 2005 and applicable to income years starting on or after January 1, 2005.

Delay Increase in Singles Exemption

The bill delays income tax reductions for single filers by delaying 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 is scheduled to increase to $12,750 on January 1, 2005 and to rise in five more annual steps to reach $15,000 on January 1, 2012. 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 2. (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.)

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 3. (The law reduces credits by 10% for each $10,000 of AGI over a specified threshold, which varies according to filing status.)

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

Banking and Insurance Fund Transfers

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

EFFECTIVE DATE: July 1, 2005

Abandoned Property Bonds

The bill delays 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 20, 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

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.

Budget Surplus Transfers

The bill requires the comptroller, if she declares a surplus for any fiscal year, to transfer to the treasurer the difference between (1) the estimated miscellaneous other General Fund revenue shown in the revenue schedule the General Assembly adopts for each fiscal year and (2) the year-end General Fund miscellaneous revenue actually realized. It requires the treasurer, after consulting with the OPM secretary, to use these funds to pay off outstanding state debt or to avoid issuing new debt.

EFFECTIVE DATE: Upon passage

Income Tax Exemption for Military Retirement Income

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: Applicable to income years starting on or after January 1, 2008.

Tax Study

The bill requires the business tax review committee to study the impact of a unitary system of corporation tax filing in Connecticut. It also requires the committee to study the effects of single vs. multi-factor income apportionment under the corporation tax.

EFFECTIVE DATE: Upon passage

RESPONSE FROM ADMINISTRATION/AGENCY:

Robert L. Genuario, Secretary Office of Policy and Management (SB 1321) opposes this bill as it represents an undesirable approach to public budget development, puts the State at risk for potentially greater problems in the future because it creates reliance on one revenue stream which has shown to be unstable, it is not fair to certain segments of the population, would put Connecticut at a competitive disadvantage in terms of attracting new businesses and residents and will set the State up for a “slide down a slippery slope” in terms of potentially significant increases in the next ten years.

Robert Genuario, Secretary Office of Policy and Management opposes this bill (SB1332) because “adopting a permanent increase in tax liability for descendents will only increase the likelihood tat wealthy state residents will relocate to avoid paying higher taxes.

Robert Genuario, Secretary of OPM (HB 6684) supported the corporate tax surcharge structure of the Governor’s bill and also supported the transfers from the Banking Fund and the Insurance Fund, and the pension changes for military personnel.

NATURE AND SOURCES OF SUPPORT:

Phil Sherwood, Connecticut Citizen Action Group supports this bill because a regressive tax system is unfair and bad for the economy as it puts an unnecessary burden on most taxpayers while at the same time failing to provide the essential funding for public services.

Jane McNichol, Executive Director of the Legal Assistance Resource Center of Connecticut supports this bill because it will provide needed revenue to restore essential state services, which were cut during the recent economic turndown and will move the State closer to a fair tax structure.

Judy Hjorth, Greater Hartford Interfaith Coalition for Equity and Justice supports this bill because a progressive income tax provides a more just, equitable and stable base to fund quality public education for all Connecticut children.

Derek Walters, Joey Fishkin, Ellen Scalettar and Shelley Geballe Advocates for Connecticut’s Children and Youth support this bill because they feel it represents an important stop toward making the Connecticut income tax fairer. They also suggest one way to improve the fairness of the income tax would be to eliminate differential treatment of those who purchase SUV’s compared to those who purchase cars for business purposes. They also feel that the current overall tax system is regressive and that this bill “moves the State in the right direction.”

Ron Cretaro, Executive Director of the Connecticut Association of Nonprofits supports this bill because it would create a more fair and equitable tax structure and distribution of tax responsibility in Connecticut.

Michael Winterfield, Greater Hartford Interfaith Coalition for Equity and Justice supports this bill as it will provide and important boost to the current Educational Cost Sharing grants, which would in turn allow municipalities to reduce their property tax levies.

Jim Horan, Executive Director Connecticut Association for Human Services supports this bill because it will generate sorely needed revenue to support programs such as Care 4 Kids child care subsidies, HUSKY and SAGA medical benefits that the legislature has cut back in recent years.

Mark Waxenberg, Director of Government Relations Connecticut Education Association supports this bill because it will create a more equitable income tax structure and will raise additional needed revenue to once again move toward the goal of 50% state funding of public education in Connecticut.

Senator Martin Looney, Eleventh District New Haven supports this bill because he supported “including and Earned Income Tax Credit because it would represent a positive step toward closing the vast gap between Connecticut’s wealthiest and poorest citizens.”

Susan Hamilton Peck, Co-Chair National Association of Social Workers Connecticut Chapter supports this bill because it creates a progressive tax structure, will create more revenue needed for educational funding, and will create a fair and equitable tax system.

Donna D. Vincenti and John R. Ivimey, Co-Chairs State Tax Committee supports SB1332 because it would provide for a unified estate and tax system and represents a comprehensive policy-based approach to transfer taxation.

Jane McNichol, Executive Director of the Legal Assistance Resource Center of Connecticut supports SB1332 because it would reinstate a tax on estates for wealthy residents resulting in a fair way to raise needed revenue.

Henry Quillen, Ellen Scalettar and Shelley Geballe, Advocates for Connecticut’s Children and Youth supports SB1332 because it is progressive and will create fairness in tax between the wealthiest and poorest in the State. ACCY also supports the surcharge on corporations in HB 6684 but recommended a lower rate. This surcharge should however be viewed as a temporary measure until we can repair Connecticut’s business taxes and level the playing field among corporations doing business in this state.

Susan Hamilton Peck, Co-Chair National Association of Social Workers Connecticut Chapter supports SB1332 because it “will decouple the estate tax from the Federal Tax structure which provides welfare for the wealthy, while decimating welfare programs for the poor and denying them to those who moderate incomes.”

NATURE AND SOURCES OF OPPOSITION:

Joe Brennan, CBIA (HB6684) opposed the surcharge tax on corporations as it would cost Connecticut Corporations over $100 million over the next two years. These tax increases make it even more difficult to compete in Connecticut.