PA 07-248—sHB 7400 (VETOED)

Finance, Revenue and Bonding Committee

Appropriations Committee

Commerce Committee

AN ACT CONCERNING VARIOUS REVENUE MEASURES

SUMMARY: This act makes many changes in state taxes. With respect to the income tax, it:

With respect to the sales tax, the act:

The act also:

EFFECTIVE DATE: Various, see below.

INCOME TAX

§§ 23 & 24 – Changes in Tax Rates and Brackets

The act increases the number of personal income tax brackets from two to five by adding three new brackets. It maintains the existing 3% bracket but breaks the higher bracket, formerly a single bracket with a flat 5% rate, into four brackets taxed at rates ranging from 4. 875% to 5. 95% for the 2007 tax year and from 4. 75% to 6. 5% starting in the 2008 tax year.

The act reduces the marginal tax rate on taxable incomes of $100,000 or under for joint filers, $53,125 or under for singles, $80,000 or under for heads of household, and $50,000 or under for couples filing separately from 5% to 4. 875% for the 2007 tax year and 4. 75% for 2008 and after. It increases tax rates on taxable incomes over $250,000 for joint filers, $132,800 for singles, $200,000 for heads of household, and $125,000 for couples filing separately from a flat 5% to 5. 7% and 5. 95% for the 2007 tax year and 5. 875% and 6. 5% for 2008 and after.

The act also increases the flat tax on trust and estate income from 5% to 5. 95% for 2007 and 6. 5% for 2008 and after.

Table 1 shows tax rates and brackets under the prior law and the act. The tax rates shown apply only to the taxable income in the applicable bracket, not to all of a taxpayer's income.

TABLE 1: INCOME TAX RATES AND BRACKETS

The act requires the Department of Revenue Services (DRS) commissioner to issue new withholding tables to take effect July 1, 2007.

EFFECTIVE DATE: July 1, 2007. The rate changes apply to tax years starting on or after January 1, 2007.

§ 25 – Property Tax Credit

The act increases the maximum property tax credit against the income tax from $500 to $1,000. It also raises the income thresholds for phasing out the credit, thus making more taxpayers at higher income levels eligible for a credit and increasing the amount of the credit those taxpayers receive (see Table 2).

Table 2 shows credit phase-out thresholds for single taxpayers for the 2007 tax year only. By law, these thresholds are scheduled to increase annually through the 2012 tax year. The act raises the annual single filer credit phase-out thresholds from $55,500 to $82,500 for 2007, $56,500 to $84,300 for 2008, $58,500 to $87,300 for 2009, $60,500 to $90,300 for 2010, $62,500 to $93,300 for 2011, and $64,500 to $96,300 for 2012 and after.

TABLE 2: MAXIMUM PROPERTY TAX CREDIT AND PHASE-OUT SCHEDULES BY FILING STATUS

EFFECTIVE DATE: July 1, 2007 and applicable to tax years starting on or after January 1, 2007.

§ 26 – Earned Income Tax Credit

The act gives people who qualify for, and claim, the federal EITC a credit against their state income tax liability equal to 20% of their federal credit for the same income year. If the credit amount exceeds the taxpayer's state income tax liability for the year, the act requires the DRS commissioner to refund the difference to the taxpayer. Credit refunds must be treated as other income tax refunds, except that they are not subject to the 0. 66% monthly interest payable on late tax refunds.

Under federal law and this act, people who work and earn incomes below certain levels qualify for income tax credits. Credit amounts vary according to a taxpayer's income and the number of children he or she has. Income limits and credit amounts are adjusted annually for inflation (26 USCA § 32).

For 2006, taxpayers received a federal EITC if they had (1) no children and incomes under $12,120 ($14,120 for joint filers); (2) one child, and an income under $32,001 ($34,001 for joint filers); and (3) two or more children, and an income under $36,348 ($38,348 for joint filers). A taxpayer could have no more than $2,800 in investment income.

EFFECTIVE DATE: July 1, 2007 and applicable to tax years starting on or after January 1, 2007.

SALES TAX

§§ 9 & 41 – Exemptions Eliminated

The act extends the 6% sales and use tax to:

1. clothing and footwear costing less than $50; and

2. property, other than caskets, sold by funeral homes and used directly in preparing and conducting burials and cremations, up to $2,500 per funeral.

It also repeals a provision allowing the DRS commissioner to adopt regulations concerning the clothing and footwear exemption.

EFFECTIVE DATE: July 1, 2007 and applicable to sales on or after that date.

§§ 7, 8, 11, & 41 – New Exemptions

The act exempts all computer and data processing services from the sales tax. Under prior law, such services were subject to a 1% sales tax. The services include programming and modifying existing programs; writing code; and studying the feasibility of, installing, or implementing a program or system in connection with canned or custom software or licensing custom software. Services for creating, maintaining, and hosting Internet websites were already exempt.

The act exempts all, rather than only some, health and athletic club services from the tax. Health and athletic club services were previously exempt if:

1. their charges were included in club dues or initiation fees subject to the dues tax,

2. they were provided by a municipality or a nonprofit organization, or

3. they were yoga instruction provided by a yoga studio.

The act exempts meals sold from both honor boxes and coin-operated vending machines. The vending machine exemption previously covered “food products. ” Although most food is not taxable, certain food products, such as soda, candy, cookies, and cakes, are subject to sales tax unless they are sold from a vending machine. In addition, meals are taxable. By law, a “meal” is food furnished, prepared, and served in a form and in a portion that is ready to eat, including take-out meals that are packaged and wrapped.

An “honor box” is typically an unattended box where customers deposit money for items they buy.

EFFECTIVE DATE: July 1, 2007. The honor box and computer and data processing exemptions apply to sales on or after that date.

§ 12 – Weatherization Products

The act extends a sales tax exemption for home weatherization products and energy efficient appliances, such as insulation, programmable thermostats, and furnaces that meet Energy Star standards, for three years until July 1, 2010. The exemption was scheduled to expire on July 1, 2007.

EFFECTIVE DATE: July 1, 2007 and applicable to sales on or after that date.

§ 10 – Streamlined Sales and Use Tax Agreement

By October 1, 2007, the act requires the state to apply to become a party to the Streamlined Sales and Use Tax Agreement (See BACKGROUND). It requires the DRS commissioner, in consultation with the Finance, Revenue and Bonding Committee, to take the steps needed to ensure state compliance with the agreement.

EFFECTIVE DATE: Upon passage

§§ 1 & 2 – BUSINESS TAX CREDIT LIMITS

The act increases the amount of corporation and insurance premium taxes companies must pay by limiting the total value of their tax credits for any income year to 60%, instead of 70%, of their total tax liability without credits. It thus requires each such company to pay at least 40%, rather than 30%, of its gross tax liability.

EFFECTIVE DATE: July 1, 2007 and applicable to income years starting on or after that date.

§§ 3 - 5 – CIGARETTE TAX INCREASE

The act increases the cigarette tax by 49 cents, from $1. 51 to $2 per pack of 20, starting July 1, 2007.

It also imposes a 49-cent tax on each pack of cigarettes that dealers and distributors have in their inventories at the later of the close of business or 11: 59 p. m. on June 30, 2007. By August 15, 2007, each dealer and distributor must report to DRS the number of cigarettes in inventory as of that time and date and pay the inventory tax. Failure to file the report by the due date is grounds for DRS to revoke a dealer's or distributor's license, and willful failure to file subjects the dealer or distributor to a fine of up to $1,000, one year in prison, or both. A dealer or distributor who willfully files a false report can be fined up to $5,000, sentenced to one to five years in prison, or both.

EFFECTIVE DATE: July 1, 2007 and applicable to cigarette sales and storage or use of unstamped cigarettes on or after that date.

§§ 6 & 16 – ESTATE AND GIFT TAXES

Tax Rates

The act (1) increases the range of tax rates on estates and gifts over $2. 1 million from between 8% and 16% to between 10% and 20% and (2) eliminates the “cliff” in the tax affecting estates valued at over $2 million. Under prior law, an estate or gift valued at $2 million or less was not taxed while the full value of any estate or gift valued at more than $2 million was taxable. This structure produced a “cliff” in which a $1 increase in the value of a gift or estate from $2,000,000 to $2,000,001 increased its tax from zero to $101,700.

Old and new tax rates are shown in Table 3. The new rates apply to deaths occurring, and gifts made, on or after January 1, 2007.

TABLE 3: ESTATE AND GIFT TAXES

Exclusion of Certain Gifts

The tax applies to gifts above the federal threshold gift tax exclusion made on or after January 1, 2005 that, in the aggregate over the donor's life after that date, exceeds $2 million. In tallying taxable gifts, the act excludes gifts that are includable in a decedent's gross taxable estate. (It appears that this adjustment is retroactive to gifts made on or after January 1, 2005. )

Tax Reduction for Out-of-State Property

Prior law gave resident estates a reduction in their Connecticut estate tax for property they own outside the state that is subject to inheritance taxes in another state or the District of Columbia. The reduction was the lesser of (1) the actual taxes paid in the other state or (2) the full Connecticut tax, excluding any gift tax credits that would otherwise be due, multiplied by the percentage of the gross estate that is under the jurisdiction of the other state.

The act eliminates the requirement that, to receive a reduction, the out-of-state property be subject to inheritance taxes in another state. Instead, it reduces the Connecticut tax on the estate by the percentage of its total property value that is under another state's jurisdiction.

EFFECTIVE DATE: July 1, 2007. The estate tax changes apply to deaths occurring on or after January 1, 2007. The gift tax changes apply to calendar years starting on or after January 1, 2007.

§§ 15-20 – TEMPORARY MOTOR FUELS TAX SUSPENSION

The act suspends collection of the 25-cent-per-gallon motor vehicle fuels tax from its date of passage through September 3, 2007 (Labor Day). The tax is paid by distributors. The act requires gasoline distributors and dealers to