Appendices

APPENDIX A

AGENCY RESPONSES:

OFFICE OF POLICY AND MANAGEMENT

AND

DEPARTMENT OF REVENUE SERVICES

Wednesday, October 26, 2005

Legislative Office Building, Room 2C

1:00 pm to 5:00 pm

1:00pm Welcome and Introduction:

Representative Brendan Sharkey and Senator Cathy Cook,

Program Review Committee Co-Chairs

1:15pm Tax System Principles and Evaluation Criteria:

Ronald Snell, Director

NCSL Economic, Fiscal & Human Resources Division

1:30pm Overview of National Trends in State and Local Tax Systems and Future Considerations for State Tax Policies:

Michael Bell, Research Professor

Center for State and Local Fiscal Policy Research,

The George Washington University

1:50pm State Experiences: Case Studies

California – Kim Rueben

Adjunct Fellow, Public Policy Institute of California and

Senior Research Associate, Urban-Brookings Tax Policy Center

Massachusetts and New Hampshire – Daphne Kenyon

Public Finance Consultant and Lincoln Institute Visiting Fellow

New Jersey – Ranjana Madhusudhan

Senior Research Economist, New Jersey Department of Treasury

Michigan and Ohio – Robert Cline

National Director, State and Local Tax Policy Economics, Ernst & Young

Maine – Darcy Rollins

Policy Analyst, New England Public Policy Center,

Federal Reserve Bank of Boston

3:30pm State and Local Tax Policy Questions & Answers:

Moderated by Ronald Snell

5:00pm Closing Remarks:

Committee Co-Chairs Representative Sharkey and Senator Cook

Appendix C

Sales & Use Taxable and Tax-Exempt Items

Tax Profile: Alcoholic Beverage Tax

Statutory Citation:

Chapter 220

Description:

Connecticut, like 31 other states and the District of Columbia, licenses private wholesale and retail sellers of alcoholic beverages (liquor, wine, and beer) and imposes an excise tax on distributors of alcoholic beverages on their sales of such beverages within the state.¹ Alcoholic beverage tax rates vary depending on the type of beverage and in proportion to alcoholic content, with the highest rates applied to beverages with the highest alcoholic content. Alcoholic beverage sales at the retail level are also subject to the state sales and use tax.

Calculation Method:

Current alcoholic beverage tax rates, along with the most recent data on sales volumes available from the Department of Revenue Services, are summarized below:

Payment Method:

Distributors of alcoholic beverages in Connecticut must obtain a tax license from DRS. (The alcoholic beverage industry is subject to state regulation by the Department of Consumer Protection and distributors, like manufacturers, wholesalers, and retailers, must also obtain permits from that agency’s liquor control division.) Each month, distributors must report to DRS:

• the total gallons of each alcoholic beverage sold;

• opening and closing inventories; and

• the amount of tax due.

The tax is due on or before the last day of each month for sales made during the previous month.

Exemptions/Credits:

The main exemptions to the alcoholic beverage tax include sales:

• to licensed distributors;

• for transport out-of-state; and

• to federal military organizations located on federal bases.

Sales of malt beverages consumed on the premises of an establishment with a manufacturer’s permit, and sales of alcoholic beverages and ethyl alcohol for medical/scientific/industrial use and not human consumption, are also exempted. Up to four gallons of alcoholic beverages may be brought into the state without taxation.

The Office of Fiscal Analysis estimates these exemptions have a minimal or indeterminate fiscal impact, except for the federal military exclusion, which is projected to reduce revenues by about $500,000.

Number of Taxpayers:

According to the most recent available DRS annual report (FY 03), the number of alcoholic beverage taxpayers totals 96 distributors per month.

History and Background:

Excise taxes on alcoholic beverages have been a revenue source, and sometimes a significant one, for all levels of government including the state of Connecticut since colonial times. In recent decades, there have been few changes made in the tax base or rate, although numerous revisions in the liquor control laws (e.g., legal drinking age, operating hours, regulatory permit structure) have occurred. Tax rates on liquor, wine, and beer in place since the 1970s were raised 20 percent in 1984 and increased significantly again in 1989. Rates have not been changed since, and there has been only a minor modification to the tax base -- the addition of certain small wineries in 1994.

Revenue Produced:

Revenues produced by the alcoholic beverage tax, summarized for the past five years in the table below, totaled about $44 million in FY 04. This represents less than 1 percent of the year’s total state tax collections.

As noted earlier, Connecticut does not rely heavily on any of its excise taxes and the alcoholic beverage tax is one of the state’s smallest tax revenue sources. Figure D-1 shows alcoholic beverage tax revenues since FY 90 have contributed less than one percent of total state tax revenues each year and the proportional share has been declining over time.

Revenue Trends:

Tax collections from the alcoholic beverage tax have remained relatively flat over the past 15 years, as Figure D-2 indicates. Between FY 90 and FY 04, revenues from the taxes on liquor, wine, and beer actually declined, from $47 million to about $44 million.

Alcoholic beverage tax revenues, when adjusted for inflation, have also experienced little real growth since FY 90. As Figure D-3 shows, the year-to-year change in inflation-adjusted revenues except for one fiscal year has been negative; in FY 04 there was a 1 percent increase in real dollar collections over the prior year.

Figure D-4, which presents the annual change in alcoholic beverage tax revenues adjusted to remove the fiscal impact of legislative rate and base changes, shows a similar pattern of flat growth. As discussed earlier, excise taxes calculated on a per unit basis, like the alcoholic beverage tax, are automatically eroded by inflation; without rate hikes or increased sales, revenues decline over time. Unlike tobacco taxes, the legislature has enacted no changes in the alcoholic beverage tax to counteract this trend. Relatively flat sales volume also appears to be contributing to this revenue decline.

Other States Comparison:

Based on January 2005 data, Connecticut’s excise tax on liquor is among the highest rates in the country while its wine and beer tax rates are close to the national median, as Figures D-5 to D-7 illustrate. At $4.50 per gallon, Connecticut’s liquor tax rate is the 8^th highest of the 33 jurisdictions that impose this excise tax (the 32 license states and the District of Columbia). Connecticut’s $0.60 per gallon rate for table wine ranked 26^th of the 48 jurisdictions with such an excise tax; its beer tax rate, $0.19 per gallon, ranked 24^th highest among the 51 jurisdictions that impose this tax.

NCSL Principles: Assessment

Equitable

Like other selected sales taxes, the alcoholic beverage tax is regressive. Assuming the same level of consumption, lower income households pay a larger share of their income in taxes on beer, wine, and liquor, than higher income households since rates are imposed at a flat, per-unit rate. Further, within beverage categories, the tax burden is the same regardless of the product price; taxpayers pay the same excise tax on a $100 bottle of wine as on a $10 bottle of wine.

Neutral

Taxes on liquor, wine, and beer, as “sin taxes,” are not intended to be neutral. a major purpose is to influence consumer behavior by moderating consumption of alcohol.

Reliable

The trend in adjusted alcoholic beverage tax revenues since FY 90 is compared with Connecticut personal income growth, a measure of the state economy, in Figure D-8. In general, alcoholic beverage taxes grow more slowly than the economy and, like the national pattern, actually seem somewhat countercyclical.² While collections do not vary significantly from year to year, revenues in real terms are declining and actions to preserve this tax as a stable state revenue source (e.g., rate increases) have not been taken. Furthermore, national research shows per capita consumption of alcoholic beverages has been stable or declining over the past two decades. Given these factors, alcoholic beverage taxes are neither a reliable nor adequate source of funding for ever escalating government expenses.

Competitive:

Connecticut’s liquor tax rate is similar to that imposed in neighboring states, although it is 20 percent higher than the national median, as Table D-2 indicates. The table wine tax in Connecticut is lower than the national median and comparable to most rates in the region. Connecticut’s excise tax on beer is about the same as the national median rate and higher than half the states in the northeast region.

Promotes Compliance

In Connecticut, as in other license states, taxes on alcoholic beverages are collected from a relatively small number of distributors on a monthly basis, which simplifies administration and enforcement. There have been no significant changes to the tax rate and base in recent years to complicate administration.

Fairly Administered/Accountable

Like other taxes applied at the wholesale level and included in the purchase price, the alcoholic beverage tax is not easily identified by consumers. Less visible taxes like the liquor, wine, and beer taxes, have less taxpayer accountability.

Tax Profile: Cigarette and Tobacco Products Taxes

Statutory Citation

Chapters 214 (Cigarette) and 214a (Tobacco Products)

Description

Like all other states, Connecticut imposes an excise tax on all cigarettes as well as on other tobacco products such as cigars, snuff, pipe tobacco, and chewing tobacco sold in the state. Sales of cigarettes and tobacco products are additionally subject to the state sales and use tax.

Calculation Method

Tax rates, as of September 2005, are:

• Cigarettes: 75.5 mills per cigarette or $1.51 per pack of 20

• Tobacco products: 20 percent of wholesale price for all products except snuff, which is taxed at $0.40 per ounce

Payment Method

Cigarette dealers and distributors, primarily candy and tobacco product wholesale companies, must be licensed by DRS and must purchase stamps or heat-applied decals to affix to each pack of cigarettes to indicate payment of tax. The tobacco products tax is imposed when the items are manufactured, imported, or purchased by distributors. Tobacco product distributors, which include all manufacturers, purchasers, and importers, also are subject to annual licensure by DRS and must remit the tax on a monthly basis.

Exemptions/Credits

The following transactions are excluded from the state cigarette and tobacco products taxes:

• Cigarette sales or purchases at military bases;

• Cigarettes sold to any state institution other than a correctional facility;

• Tobacco products exported from Connecticut; and

• Tobacco products sold to the federal government.

The Office of Fiscal Analysis estimates these exclusions have an indeterminate or minimal ($50,000 or less) fiscal impact except for the exported tobacco products exemption, which is projected to reduce potential revenues by about $5 million.

Number of Taxpayers

Direct taxpayers, according to the most recent available DRS annual report (FY 03), total:

• Cigarette dealers/distributors: 67 per month

• Tobacco product distributors: 225 per month

History and Background:

Over the past 15 years, the per pack tax rate on cigarettes has changed frequently in Connecticut. Substantial increases were enacted in 2002 and 2003, specifically the per pack rate increased:

• 122 percent, from $0.50 to $1.11, effective April 1, 2002 (P.A. 02-1); and

• Another 36 percent, from $1.11 to $1.51, effective March 15, 2003.

Further increases were proposed by the governor for consideration in the 2005 legislative session but were not adopted. Earlier changes in the cigarette tax per-pack rate since 1990 include:

• FY 90 – increase from $0.26 to 0.40 (P.A. 89-16).

• FY 92 – increase from $0.40 to $0.45 (P.A. 91-3 JSS)

• FY 94 – increase from $0.45 to $0.47 (P.A. 93-74)

• FY 95 – increase from $0.47 to $0.50 (also P.A. 93-74)

In 1990, the state also instituted the tax on tobacco products other than cigarettes (P.A. 89-251).

Revenues Produced

In FY 04, the Cigarette and Tobacco Product Taxes together raised almost $280 million, just under 3 percent of total state-only tax revenues collected that year. Most of the revenue (96 to 98 percent) comes from the cigarette tax as Table D-3 indicates. The tax on other tobacco products has produced no more than $5.5 million annually since it was first levied.

Connecticut’s tax system does not rely heavily any of its excise taxes and its cigarette and tobacco product taxes are very small revenue sources. In recent years, due to higher rates, the proportional contribution to state revenues of these taxes rose to nearly 3 percent after dropping to under 2 percent following institution of the state’s personal income tax in 1991. (See Figure D-9.) Like many states, however, Connecticut uses hikes in its cigarette tax to help make up revenue shortfalls during fiscal crises.

Revenue Trends

Connecticut, like most states, has continually increased its cigarette tax rate to reverse an overall trend of declining revenues related to diminishing tobacco product consumption. The year to year fluctuations in actual tax collections, shown in Figure D-10, reflect these periodic rate changes. Most recently, cigarette tax revenues jumped significantly because of the legislation enacted during the 2002 and 2003 that together more than doubled the per pack tax rate.

As Figure D-11 illustrates, growth in revenues from the cigarette and tobacco products taxes, when adjusted for legislative changes made to the tax rate, has been small or negative since FY 90. Real revenue growth since that fiscal year, presented in Figure D-12, shows a similar pattern. The only significant growth in tobacco tax revenues adjusted for inflation occurred after the legislature enacted major rates increases during the state’s most recent fiscal crisis.

Other States Comparison:

All 50 states and the District of Columbia have an excise tax on cigarettes, and counties and cities in several states are permitted to impose an additional tax on tobacco products. As of January 2005, the highest per-pack cigarette tax is $2.46 in Rhode Island, the lowest is $0.03 in Kentucky and median per-pack tax rate is $0.695. At $1.51, Connecticut, along with Massachusetts, currently ranks 6^th highest in the country. (See Figure D-13 for a comparison of all state per pack cigarette tax rates.)

NCSL Principles: Assessment

Equitable

Connecticut’s cigarette tax, like other selected sales taxes, is regressive. The rate is the same, $1.51 per pack, for all taxpayers regardless of ability to pay. Tax burden data specific to Connecticut are not available, but a recent study by the Institute on Taxation and Economic Policy found that nationwide, cigarette taxes are about ten times more burdensome for low-income taxpayers than for the wealthiest taxpayers.³ Specifically, the institute analysis showed in 2002 the share of personal income spent on average on cigarette taxes 0.9 percent for the poorest 20 percent of non-elderly Americans and less than 0.1 percent for those in the top 1 percent income group.

Neutral

Taxes on cigarette and other tobacco products, which are referred to as “sin taxes,” are not intended to be neutral. A major purpose of the tax is to influence consumer behavior by discouraging smoking.

Reliable

The trend in adjusted state tobacco tax revenues since FY 90 is compared with Connecticut personal income growth, a measure of the state economy, in Figure D-14. As the figure indicates, tobacco consumption is not closely related to economic conditions. In general, since cigarette sales not affected by economic downturns as much as other types of products, tobacco taxes are considered a relatively stable revenue source

At the same time, as Figure D-14 also shows, tobacco taxes grow more slowly than the economy. This is partly because, like other excise taxes, tobacco taxes are calculated on a per unit basis; unlike price-based consumption taxes, they do not go up automatically with inflation.⁴ In addition, absent legislated rate hikes to compensate for declining tobacco product sales, revenue growth has been negative in 11 of the past 15 year. Given these factors, the state’s tobacco taxes are neither a certain nor sufficient source of funding for public services that grow most costly each year.

Over the 15 year period shown in Figure D-15, actual cigarette and tobacco product tax collections have been within 10 percent of budgeted revenues except for FY 02. The large difference that year was due to a significant rate increase enacted during the legislative session and therefore not accounted for in original projections. The wider than average gaps in the most recent two years, however, may be evidence of growing tax evasion problems and the difficulties that creates for revenue estimates.

Rate hikes, particularly in excise taxes, can prompt consumers to shop in border states with lower rates, use the Internet for tax free purchases, or even resort to “black market” vendors. A May 2005 report by the Tax Foundation notes new guidelines for estimating how much cigarette sales will fall as price increases (i.e., the “elasticity of demand” for cigarettes) are needed since untaxed products are so much more easily available.⁵

Traditionally, researchers considered the elasticity for cigarettes to be one-third, meaning a 33 percent increase in prices would reduce sales by 11 percent. Some economist now believe the correct estimate may be two in certain cases; that is, increasing cigarette prices by one-third will cause sales to drop by two-thirds. It is generally agreed tobacco product taxes are becoming less predictable as well as less dependable as a state (or local) revenue source.

Competitive

As of January 2005, Connecticut’s per-pack cigarette tax is similar to the rates in effect in neighboring states, as Table D-4 shows. However, it is higher than four of the seven other states in the region, fourth highest in the U.S., and is well above the national median.⁶ In contrast, Connecticut’s tax rate on other tobacco products is among the lowest in the region. Given the state’s already high cigarette tax rate, further hikes could make tobacco tax revenues even more vulnerable to erosion from smuggling and internet sales.

Promotes Compliance

In Connecticut, like many states, tobacco taxes are collected at the wholesale level, making the number of taxpayers relatively small. This simplifies administration and enforcement although the cigarette tax stamp process, required in most states including Connecticut, adds complexity and expense for the administrative agency and tobacco product distributors. Some extra work is also created by the repeated changes in the cigarette tax rate in recent years.

Fairly Administered/Accountable

Like other taxes applied at the wholesale level and included in the purchase price, tobacco product taxes are not easily identified by consumers. Less visible taxes like the cigarette tax have less taxpayer accountability.

Profile: Motor Vehicle Fuels Tax and Motor Carrier Road Tax

Statutory Citation:

Chapters 221 (Motor Vehicle Fuels) and Chapter 222 (Motor Carrier)

Description:

Connecticut like all other states and the District of Columbia imposes an excise tax on motor fuels and earmarks the revenues for transportation purposes. Motor vehicle fuels in Connecticut are statutorily defined as gasoline, diesel, gasohol, propane, or any combustible gas or liquid that generates the power needed to propel a motor vehicle. Like other states, Connecticut has two similar but separate motor fuel tax programs:

• The Motor Vehicle Fuels Tax is a per gallon levy imposed on distributors of fuel sold or used within the state, which is included in the price consumers pay at the pump.

• The Motor Carrier Road Tax applies only to certain heavier vehicles (i.e., trucks and buses over 26,000 gross weight or with more than two axles) generally engaged in interstate commerce. It is intended to address tax avoidance by ensuring such vehicles either purchase fuel in Connecticut or pay an amount equal to the motor fuel tax on fuel used in the state but not purchased here, based on the motor carrier’s reported mileage and fuel purchases.

Both motor fuel taxes impose the same per gallon rates, which vary by type of fuel.

Calculation Method:

Current motor fuel tax rates, along with the most recent sales volume data available from DRS, are summarized below:

Payment Method:

Distributors of motor vehicle fuels must pay their motor vehicle fuels tax to the Department of Revenue Services on or before the 25^th day of each month, based on their previous month’s sales. Taxpayers subject to the motor carrier road tax must file quarterly returns and make payments quarterly (by the end of the month in January, April, July, and October). All motor carriers are required to obtain tax licenses from DRS as well as purchase decals to affix to all their vehicles subject to the motor carrier road tax.

Since 1996, Connecticut has been part of a cooperative agreement in effect in most states and Canadian provinces, the International Fuel Tax Agreement (IFTA). The agreement was designed to simplify motor fuel tax reporting and collection for interstate motor carriers. Under IFTA, motor carriers are required to file quarterly returns only in their base jurisdiction (e.g., where operations are controlled and vehicles are registered); fuel tax collections are then allocated to states based on miles traveled in each jurisdiction. Credit is allowed for taxes paid on motor fuels purchased within a state; refunds are made if a motor fuels tax credit amount exceeds the motor carrier road tax due. Connecticut does not require motor carriers who travel solely within the state (intrastate motor carriers) to file a return; instead, they pay the tax at the time of fuel purchase.

Exemptions/Credits:

There are a number of exemption, refund, and credit provisions for both the motor vehicle fuels and motor carrier road taxes. The main ones are listed below, along with the OFA estimated fiscal impact (shown in parentheses).

• Motor Vehicle Fuels Tax Exemptions: aviation fuel ($45 million) heating fuel ($100 million); fuel transferred out of state (indeterminate); fuel exported by distributor licensed out of state ($113 million); alternative fuels used by certain vehicle fleets (less than $0.5 million); fuel purchased by or used for federal government (indeterminate) , municipal contractors (indeterminate); transit districts, municipal or state governments ($10 million), fuel distributors ($711 million), farming (indeterminate), industrial fabrication, agricultural production, and fishing (indeterminate)

• Motor Vehicle Fuels Tax Refunds: vehicles not operated on highways ($3 million); Connecticut motor bus companies and livery services and 50% refunds for taxicabs and airport livery and bus services ($million); high occupancy commuter vehicles; municipal, state, and federal government vehicles; transit districts vehicles; hospital and civic group ambulances; farming vehicles; vehicles used for Meals on Wheels deliveries (latter refunds all less than $0,5 million each)

• Motor Carrier Road Tax Exemptions: interstate charter and tour buses; school buses; federal government (indeterminate)

• Motor Carrier Road Tax Credits: motor vehicle fuels tax paid on instate purchase ($1 million)

Number of Taxpayers:

According to the most recent available DRS annual report (FY 03), motor fuel taxpayers by type include:

• Motor Vehicle Fuels Tax distributors: 700/month

• Motor Carriers: 2,900 IFTA/quarter; 3,500 intrastate motor carriers

History and Background:

At the federal and state level, excise taxes on gasoline and other motor fuels that raise revenues for highway construction and maintenance and other purposes have a long history. Over the years, in Connecticut and other states, additional fuels have been added to the tax base, and rates have been raised and lowered for environmental as well as economic reasons. Since 1983, revenues from Connecticut’s motor fuels taxes have been dedicated to the state Special Transportation Fund created that year.

Since 1990, a number of changes in both the base and the rates of the motor fuel taxes have been enacted. The main legislative revisions included:

• 1992 – temporary increase in diesel rate to $0.18

• 1993 – diesel rate increase made permanent

• 1994 – motor fuel tax rates increased $0.05 per gallon, in $0.01 per year increments from October 1995 to January 1997; propane rate made equivalent (increased) to diesel rate

• 1995 – exemptions for alternative fuels (e.g., compressed as well as liquefied natural gas, liquefied petroleum gas) expanded and extended

• 1998 – gasoline tax rate reduced from $0.39 to $0.36 on 7/1/97 and from $0.36 to $0.33 on 7/1/98

• 1999 – gasoline tax rate additionally reduced form $0.33 to $0.32 on 7/1/98

• 2001 – gasoline tax rate reduced from $0.32 to current $0.25 rate on 7/1/00

• 2004 – gasohol tax rate increased from $0.24 to $0.25

During 2005, governors and legislatures in many states including Connecticut considered a variety of options for lowering the motor fuels taxes (e.g., temporary suspension of motor fuel taxes, rate reductions, and motor fuel tax “holidays.”) in response to soaring gasoline prices. However, no changes were made to any provisions of Connecticut’s motor fuel excise taxes.

Revenue Produced:

The Connecticut motor fuels excise taxes are the state’s most substantial selected sales taxes. In FY 04, the motor vehicle fuels and motor carrier road taxes together produced nearly $465 million in revenues. Motor fuel taxes, while a relatively small contributor to total state tax revenues, are the fourth largest tax source for Connecticut. As Table D-5 indicates, the motor vehicle fuels tax is responsible for the bulk of collections while the motor carrier tax, on average, accounts for about 3 percent of the total revenues.

On average since FY 90, motor fuel taxes have contributed fewer than 6 percent of total state tax revenues. However, as Figure D-16 shows, this proportional share has been declining over time. At present, Connecticut’s reliance on motor fuel taxes as a state revenue source is lower than the US average. In 2004, motor fuel excise taxes accounted for 5.7 percent of all state tax collections in the US but only 4.5 percent of total state tax revenues in Connecticut.

Revenue Trends: Actual motor fuels tax collections, shown in Figure D-17 below, grew steadily through most of the 1990s, peaking in FY 97. Some of the subsequent drop off in revenues reflects the impact of a series of tax rate reductions enacted by the legislature beginning in 1998.

Annual growth in motor fuel tax revenues adjusted for such legislative changes (increases and decreases in tax rates and base), is presented in Figure D-18. While fluctuations in these adjusted revenues are less dramatic than in actual collections, the year to year variation motor fuel taxes due to primarily to economic factors is still considerable.

Figure D-19 shows the real growth in actual motor fuel tax collection, which is the annual change in revenues adjusted for inflation. In the first half of the period shown, motor tax revenues grew beyond the inflation rate, rising in real value about 5 percent annually on average. In contrast, after FY 97, repeated tax rate cuts contributed to negative real growth every year. The year-to-year drop in inflation-adjusted motor fuel tax revenues between FY 98 and FY 04 ranged from around minus 1 percent to almost minus 20 percent and averaged minus 4 percent.

Other States Comparison:

As of January 2005, Connecticut’s per gallon gasoline tax rate of $0.25 was the 10^th highest in the country as Figure D-20 shows. While state gas tax rates ranged from only $0.04 (Florida) up to $0.30 (Rhode Island), half of the states imposed a tax of at least $0.20 per gallon. As mentioned earlier, a number of states are considering or have already instituted lower motor fuel tax rates since January 2005 so current state rankings are likely to differ from the data compiled at the beginning of this year.

NCSL Principles: Assessment

Equitable

Like other per unit excise taxes, Connecticut’s motor vehicle fuels and motor carrier road taxes are regressive. Tax rates are unrelated to ability to pay so low-income households spend more of their income on gasoline and other motor fuel taxes than middle and higher income households.

Neutral

Motor fuel taxes, in general, are not intended to encourage or discourage gasoline or other vehicle fuel consumption. High taxes, however, can influence consumer decisions about the types of vehicles they drive and how much they drive. In addition, some states, including Connecticut, have established preferential tax polices to encourage the use of “cleaner” alternative fuels for environmental purposes (e.g., improved air quality.)

Reliable

Motor fuel taxes, like other per unit excise taxes, do not keep pace with the economy without rate hikes. As Figure D-21 shows, motor fuel revenues when adjusted for legislative changes have grown at rates below Connecticut personnel income growth in all but two years since FY 90; growth rates for the tax were negative for six years in the period shown. Overall, while the state personal income rose on average 4.4 percent per year, the average annual increase in adjusted motor fuel tax revenues was about 0.4 percent. Given these factors, motor fuel taxes are not a reliable and adequate revenue source to support ever increasing transportation system needs.

Adequate revenue growth is compounded by fact that vehicles are generally becoming more fuel efficient. As fuel consumption declines, so do related tax revenues unless rates are increased. To preserve motor fuel tax revenues and avoid the need to frequently legislate tax hikes, some states index their gas tax rates. Indexing means tax rates are adjusted each year relative to changes in an economic indicator, such as the consumer price index, or a measure related to the taxed activity, vehicle miles traveled or total fuel consumption, for example.

Competitive

Connecticut’s motor fuel tax rates are among the highest in the region. Connecticut has the fourth highest gasoline tax and the third highest diesel and gasohol taxes (including additional tax rates with excise rates) of the eight states shown in Table D-5. While it is likely some motor fuel tax revenues are lost to neighboring states with lower rates, the fiscal impact of Connecticut’s comparatively high rate has not been examined.

Promotes Compliance

Like other taxes collected at the wholesaler level, the motor vehicle fuels tax motor fuels is paid by a relatively small number of taxpayers, which simplifies administration and enforcement. The number of motor carrier road taxpayers is significantly larger and the process requires licensing as well as filing of reports; both factors result in more complicated and expensive processing for DRS and taxpayers. Participation in IFTA has simplified motor carrier road tax administration and it is expected that Connecticut’s participation in the FTA motor vehicle fuels tax uniformity project will similarly improve processing and compliance in that tax program. Frequent gasoline tax rate changes in recent years along with the addition and expansion of various exemptions for alternative fuels has likely complicated tax administration and compliance.

Fairly Administered/Accountable

Like other taxes applied at the wholesale level and included in the purchase price, motor fuel taxes are not easily identified by consumers. Less visible taxes like the excise tax on gasoline and other motor fuels, therefore, are less accountable to taxpayers.

Appendix J: Options for Redistributing Sales Tax to Municipalities

Appendix K. Supporting Data Regarding Reliable Principle

Appendix L: Tax Burden Comparison Among the Northeastern States