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OFA Fiscal Note and OLR Bill Analysis

sSB-932

AN ACT CONCERNING VARIOUS REVENUE MEASURES.

OFA SUMMARY IMPACT:

State Impact:

Note: GF=General Fund

Municipal Impact: None

In addition to the revenue impact outlined below the Department of Revenue Services will incur primarily one-time costs of $ 500,000 to administer the tax changes. These costs are likely to be incurred in FY 10.

OLR SUMMARY:

This bill increases the income tax by:

The bill increases business taxes by:

The bill also:

The bill also makes technical and conforming changes.

EFFECTIVE DATE: Various. See below.

INCOME TAX

§ 16 – Rate Increase

OFA Fiscal Impact

The bill is anticipated to result in General Fund revenue to the personal income tax of $ 1. 226 billion in FY 10 and $ 825. 9 million per year beginning in FY 11. The expected revenue gain for FY 10 is for 18 months (January 2009 through June 2010).

OLR Analysis

This bill increases income taxes for those with taxable incomes over $ 250,000 for joint filers, $ 132,500 for single filers, $ 200,000 for heads of household, and $ 125,000 for married people filing separately. It does so by adding four higher-income brackets and increasing the marginal tax rates for those brackets from a flat 5. 0% to a range of 6. 0% to 7. 95%. It increases the flat tax rate for trusts and estates from 5. 0% to 7. 95%.

Table 1 shows tax rates and brackets under the current law and the bill. (Note: The tax rates shown apply only to the taxable income in the applicable bracket, not to all of a taxpayer's income. )

TABLE 1: CURRENT AND PROPOSED TAX RATES AND BRACKETS

EFFECTIVE DATE: July 1, 2009 and applicable to tax years starting on or after January 1, 2009.

§ 20 – Property Tax Credit

OFA Fiscal Impact

The bill is anticipated to result in a General Fund revenue gain to the personal income tax of $ 72. 5 million in FY 10 and $ 324. 0 million per year beginning in FY 11.

OLR Analysis

The bill lowers the income thresholds for phasing out the property tax credit against the income tax by 25% (27% for single filers) for the 2009 tax year and 75% (76% for single filers) for the 2010 tax year. It also makes the phase-out steps smaller so the credit phases out faster. These changes make fewer taxpayers eligible for the credit and reduce the maximum amounts taxpayers receive if their incomes exceed the lower phase-out thresholds. Table 2 shows the current and proposed credit phase-out thresholds for the two years, by filing status.

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

EFFECTIVE DATE: July 1, 2009 and applicable to tax years starting on or after January 1, 2009.

§§ 18 & 19 – Delay in Scheduled Income Tax Reductions for Single Filers

OFA Fiscal Impact

The bill is anticipated to result in a General Fund revenue gain to the personal income tax of $ 23. 9 million in FY 10, $ 30. 2 million in FY 11, $ 36. 4 million in FY 12, $ 30. 8 million FY 13, $ 18. 9 million in FY 14, and $ 6. 3 million in FY 15.

OLR Analysis

The bill delays scheduled income tax reductions for single filers for three years. It delays scheduled increases in (1) their adjusted gross income (AGI) exempt from the tax and (2) income thresholds for reducing their personal exemptions and credits.

Personal Exemption. The maximum personal exemption for single filers for the 2008 tax year is $ 13,000. Under current law, the maximum exemption is scheduled to increase to $ 13,500 on January 1, 2009 and to rise in five more annual steps to $ 15,000 on January 1, 2012. The bill instead maintains the $ 13,000 personal exemption for three more years, through the 2011 tax year, delaying the increase to $ 13,500 and each subsequent increase by three years. It also delays scheduled increases in the exemption reduction thresholds to correspond, as shown in Table 3. (The income tax personal exemption is reduced by $ 1,000 for each $ 1,000 of AGI over a specified threshold, which varies according to filing status. )

TABLE 3: PERSONAL EXEMPTIONS FOR SINGLE FILERS

Personal Credit. The bill also delays by three years scheduled increases in income ranges that allow single filers to qualify for personal credits against their income tax. Personal credits range from 1% to 75% of tax liability depending on AGI. Filers with AGIs above specified levels, which vary depending on filing status, do not qualify for any credit. Table 4 shows qualifying personal credit income ranges for single filers under current law and the bill.

TABLE 4: PERSONAL CREDITS FOR SINGLE FILERS

EFFECTIVE DATE: July 1, 2009 and applicable to income years starting on or after January 1, 2009.

CORPORATION TAX

§§ 3 & 7 – Surcharge

OFA Fiscal Impact

The bill is anticipated to result in a General Fund revenue gain to the corporation tax of $ 160. 0 million in FY 10, $ 106. 0 million in FY 11, and $ 49. 0 million in FY 12.

OLR Analysis

The bill imposes a 30% corporation tax surcharge for income years 2009, 2010, and 2011. Companies must calculate their surcharges based on their tax liability excluding any credits. The surcharge is due, payable, and collectible as part of each company's total tax for the year.

The surcharge applies to all companies that pay the tax, except those owing only the $ 250 minimum tax. It applies both to companies that pay the tax on their net income and those that pay on their capital base.

EFFECTIVE DATE: July 1, 2009 and applicable to income years starting on or after January 1, 2009.

§§ 2, 4 & 6 – Exemptions for Domestic International Service Companies (DISCs)

OFA Fiscal Impact

The bill is anticipated to result in a General Fund revenue gain to the corporation tax of $ 50 million per year beginning in FY 10.

OLR Analysis

The bill eliminates corporation tax exemptions for (1) companies that qualify under the federal tax code as domestic international service companies (DISCs) and (2) dividends that other companies receive from DISCs. It also requires companies to include receipts from DISCs in their total receipts for interstate apportionment purposes.

Under the federal tax code, companies that meet certain conditions (see BACKGROUND) and receive most of their income from qualified exports, can elect to be treated as interest charge DISCs (IC-DISCs) for federal tax purposes. Unlike most corporations, IC-DISCs are not generally subject to federal tax on their income. Instead, their shareholders pay taxes on the income when it is actually distributed, but federal law allows the taxes on those distributions to be deferred if the shareholders pay annual interest on the deferred amounts. The IRS establishes the annual interest rate based on the 12-month Treasury bill interest rate (Internal Revenue Code, §§ 992; 995(f)).

EFFECTIVE DATE: July 1, 2009 and applicable to income years starting on or after January 1, 2009.

§§ 1 & 5 – TAX CREDIT LIMITS – INSURANCE PREMIUM AND CORPORATION TAX

OFA Fiscal Impact

The bill is anticipated to result in a General Fund revenue gain to the corporation tax and insurance premiums tax of $ 10. 0 million in FY 10 and $ 40. 0 million per year beginning in FY 11.

OLR Analysis

The bill reduces the maximum total value of tax credits that a company can take against its insurance premium or corporation tax liability for any income year from 70% of its liability without the credits to (1) 65% for the income year starting January 1, 2009 and (2) 50% for income years starting on or after January 1, 2010.

EFFECTIVE DATE: July 1, 2009 and applicable to income years beginning on or after January 1, 2009.

§§ 4 & 17 – DECOUPLING FROM THE FEDERAL DOMESTIC PRODUCTION ACTIVITY DEDUCTION

OFA Fiscal Impact

The bill is anticipated to result in a General Fund revenue gain to the corporation business tax of $ 27. 5 million per year beginning in FY 10.

OLR Analysis

The bill bars companies and individuals from using the federal tax deduction for domestic production activity when determining their taxable income for the state corporation and income taxes, thus increasing their state tax liability.

Federal tax law allows corporations, individuals, and pass-through companies to deduct a percentage of qualifying income they earn from eligible production activities taking place wholly or mostly within the United States. Eligible production activity includes manufacturing, construction, engineering, energy production, computer software, films and videotape, and agricultural products processing. The percentage deduction is 6% for 2008 and 2009 and 9% for 2010 and after (Internal Revenue Code § 199).

The bill requires (1) corporations to exclude the domestic production activity deduction when calculating net income for purposes of the state corporation tax and (2) individuals to add back any such deduction included in their federal AGI when calculating Connecticut AGI for state income tax purposes.

EFFECTIVE DATE: July 1, 2009. The corporation tax change applies to income years starting on or after January 1, 2009 and the income tax change applies to tax years starting on or after January 1, 2009.

§§ 8-10 – CIGARETTE TAX

OFA Fiscal Impact

The bill is anticipated to result in a General Fund revenue gain of $ 36. 0 million in FY 10 and $ 63. 0 million per year beginning in FY 11. The estimates include the impact to: 1) the cigarette excise tax, 2) the sales and use tax, and 3) a one-time revenue gain of $ 4. 4 million in FY 10 as a result of the floor tax.

OLR Analysis

The bill increases the cigarette tax by 50 cents, from $ 2 to $ 2. 50 per pack of 20 (from 10 cents to 12. 5 cents per cigarette), starting January 1, 2010.

The bill also imposes a 50-cent “floor 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 December 31, 2009. By March 15, 2010, each dealer and distributor must report to the Department of Revenue Services (DRS) the number of cigarettes in inventory as of that time and date and pay the inventory tax. If a dealer or distributor does not report by the due date, the DRS commissioner must file the report, estimating the number of cigarettes in the dealer's or distributor's inventory using any information the commissioner has or obtains.

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. Late filers are also subject to the same interest and penalties as apply to other late cigarette tax payments.

EFFECTIVE DATE: January 1, 2010. The increased rate applies to cigarette sales on or after that date.

§ 11 – ESTATE TAX SURCHARGE

OFA Fiscal Impact

The bill is anticipated to result in a General Fund revenue gain to the estate and gift tax of $ 42. 7 million in FY 10, $ 51. 2 million in FY 11, and $ 53. 3 million in FY 12.

OLR Analysis

The bill imposes a 30% surcharge on the estate tax of those who die during 2009, 2010, and 2011. The estate tax applies to taxable gifts and estates over $ 2 million. Under the bill, the surcharge must be added to the Connecticut estate tax due and is payable in the same manner as the underlying tax.

EFFECTIVE DATE: July 1, 2009 and applicable to estates of those who die on or after January 1, 2009.

SALES TAX

§ 13 – Sales Tax Free Week

OFA Fiscal Impact

The bill is anticipated to result in a General Fund revenue gain to the sales and use tax of $ 4. 2 million in FY 10 and $ 4. 4 million in FY 11.

OLR Analysis

The bill suspends the sales tax free week for the 2009 and 2010 calendar years. Under current law, clothing and footwear costing less than $ 300 is not subject to the state's 6% sales tax when purchased between the third Sunday in August and the following Saturday.

EFFECTIVE DATE: July 1, 2009

§§ 12, 14, 15 & 21-32 – Sales Tax Exemptions Eliminated

OFA Fiscal Impact

The bill is anticipated to result in a General Fund revenue gain to the sales and use tax of approximately $ 80 to $ 120 million per year beginning in FY 11. The bill is also anticipated to result in a General Fund revenue loss to the real estate conveyance tax of approximately $ 1 to $ 3 million per year beginning in FY 11.

OLR Analysis

Starting July 1, 2010, the bill repeals many sales tax exemptions and extends the 6% sales tax to certain services that are currently exempt. Table 5 lists the eliminated exemptions, by category. Exemptions requiring additional explanation are described separately below. The bill also makes technical and conforming changes.

TABLE 5: SALES TAX EXEMPTIONS ELIMINATED

EFFECTIVE DATE: July 1, 2010 and applicable to sales occurring on or after that date.

§ 12 – Amusement and Recreation Services (Revised)

The bill extends the sales tax to certain amusement and recreation services.

Under the bill, the sales tax applies to charges for activities included in major group 79 of the 1987 Standard Industrial Classification Manual or sector 71 in the 1997 North American Industrial Classification Manual. These classifications cover such activities, events, and venues as performing arts; professional and other spectator sports; museums and historical sites; zoos and botanical gardens; the amusement, gambling, and recreation industries, including amusement and theme parks and arcades; golf and country clubs; marinas; skiing facilities; fitness and recreational sports centers; dance studios; and bowling alleys.

The bill continues to exempt charges for dancing lessons and amusement and recreation services provided:

The governmental and nonprofit exemptions specified above do not apply to athletic or sporting activities unless they are organized exclusively for people under age 19.

EFFECTIVE DATE: July 1, 2010 and applicable to sales occurring on or after that date.

§ 15 – Trade-In Allowance for Licensed Motor Vehicle Dealers

The bill eliminates the sales tax trade-in allowance for licensed motor vehicle dealers. Under current law, when a dealer replaces a vehicle that was registered to the dealer and that is no longer in the dealer's possession, the sales tax applies only to the difference between the cost of the new vehicle and the wholesale value of the one being replaced. The bill makes the tax apply to the full price of the new vehicle.

EFFECTIVE DATE: July 1, 2010 and applicable to sales occurring on or after that date.

§ 32 – Trade-In Allowance on Certain Construction Equipment or Machinery

The bill eliminates a trade-in allowance against the sales tax on new self-powered construction machinery or equipment. Under current law, the sales tax on sales of new machinery or equipment must be based on the difference between the amount allowed by the retailer as trade-in value on the old equipment and the price of new equipment.

EFFECTIVE DATE: July 1, 2010 and applicable to sales occurring on or after that date.

§ 32 – Mobile Manufactured Home Exemptions

The bill eliminates sales tax exemptions for (1) 30% of a manufacturer's sale price for a new mobile manufactured, modular, or prefabricated home and (2) resale of a modular home or mobile manufactured home located in mobile home parks or on a single-family lot. It also eliminates a requirement that subjects the resale of a mobile manufactured or modular home to the real estate conveyance tax.

EFFECTIVE DATE: July 1, 2010 and applicable to sales occurring on or after that date.

§ 32 – Sales Tax Credit for Computer Equipment Provided to Higher Education Institutions

The bill eliminates a sales tax credit on computer equipment a qualifying company buys on or after July 1, 2000 to use in Connecticut for electronic commerce. A qualifying company is one that (1) is selected by the commissioner of higher education and (2) holds a direct pay sales tax permit.

The credit equals the resources the permit holder provides on or after July 1, 2000 to a Connecticut college or university for (1) designing, planning, building, or renovating buildings or classrooms; (2) acquiring computer equipment; or (3) acquiring property or licenses needed to operate computer programs used for student instruction in business studies related to electronic commerce or workforce development. In calculating the amount of the resources provided, a company can include cash and the value of property and services. The maximum credit is $ 2 million.  

EFFECTIVE DATE: July 1, 2010 and applicable to sales occurring on or after that date.

§§ 22 & 30 – Effects of Certain Conforming Changes

Property Tax Exemption for High Mileage Vehicles. The bill eliminates a municipal option to provide a property tax exemption for a high-mileage passenger vehicle covered by state sales tax exemption for such vehicles. The repeal takes effect on the same dates the sales tax exemption is scheduled to expire, i. e. , on July 1, 2010.

Deer Damage Permit Application. By eliminating the farmer sales tax exemption permit, the bill also eliminates a provision allowing a person to whom such an exemption permit is issued and who leases land to sign an application for a Department of Environmental Protection permit to kill deer causing damage to crops on the land. Thus, under the bill, only the landowners may sign a deer damage permit application.

EFFECTIVE DATE: July 1, 2010

BACKGROUND

IC-DISCs

To be an IC-DISC, a corporation must be organized under the laws of a state or the District of Columbia and:

The Out Years

The annualized ongoing fiscal impact identified above would continue into the future subject to inflation.

COMMITTEE ACTION

Finance, Revenue and Bonding Committee

Joint Favorable Substitute