OLR Bill Analysis

SB 1801 (as amended by Senate “A”)*

Emergency Certification

AN ACT CONCERNING THE STATE BUDGET FOR THE BIENNIUM ENDING JUNE 30, 2011, AND MAKING APPROPRIATIONS THEREFORE.

SUMMARY:

This bill appropriates funds for state agencies and programs for FY 10 and FY 11. It also increases taxes and makes other revenue changes.

A full summary of the bill's budget provisions ( 1-72) may be found in the Office of Fiscal Analysis fiscal note. An analysis of the bill's revenue provisions ( 73-104) appears below.

*Senate Amendment “A” adopts revenue estimates for FY 10 and FY 11 for the General Fund, the Mashantucket Pequot and Mohegan Fund, and the Criminal Injuries Compensation Fund.

EFFECTIVE DATE: Various, see below.

1-72 – BUDGET PROVISIONS

Please refer to the Fiscal Note for an explanation and summary of these sections.

73 – SECURITIZATION PLAN

The bill requires the state treasurer and the OPM secretary jointly to develop a financing plan to raise up to $ 335 million in net general state revenue for FY 11. The plan can include “securitization” of revenue from the state lottery; issuing bonds and other debt instruments or placing them privately; or the purchase of state debt instruments by public pension and trust funds, such as the state, municipal employees', and teachers' retirement funds. “Securitization” allows the state to borrow against a future revenue stream.

The treasurer and secretary must finish the plan and provide it to the chairpersons of the Appropriations and Finance, Revenue and Bonding committees by February 3, 2010.

EFFECTIVE DATE: July 1, 2009

74 – MARSHAL FEE INCREASE

Starting October 1, 2009, the bill increases the annual fee each state marshal must pay from $ 250 to $ 750. The fee is payable by October 1 each year to the State Marshal Commission. The fee revenue is deposited in the General Fund.

By law, state marshals are independent contractors compensated on a fee-for-service basis. They provide legal execution and service of process. The State Marshal Commission fills vacancies in state marshal positions, sets professional standards for them, reviews and audits their records and accounts, and can remove a state marshal for cause after notice and a hearing.

EFFECTIVE DATE: July 1, 2009

75 – DEPARTMENT OF SOCIAL SERVICES DEADLINES FOR SERVICE OF PROCESS

The bill requires Department of Social Services (DSS) commissioner to send any subpoena, summons, warrant, or court order related to department-initiated proceedings to a state marshal for service if (1) no action has been taken on it within the preceding 14 days and (2) the underlying proceedings are unresolved. In addition, to resolve any backlog, the bill requires that, starting August 1, 2009, the commissioner forward up to 150 such documents per month to state marshals for service, if no action has been taken on them within the preceding 30 days.

EFFECTIVE DATE: July 1, 2009

INCOME TAX

95 – Rate Increase

The bill increases income taxes for those with taxable incomes over $ 500,000 for joint filers, $ 265,000 for single filers, $ 400,000 for heads of household, and $ 250,000 for married people filing separately. It does so by adding three higher-income brackets and increasing the marginal tax rates for income in those brackets from a flat 5. 0% to a range of 6. 0% to 7. 5%. It increases the flat tax rate for trusts and estates from 5. 0% to 7. 5%.

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

TAX RATES

CT TAXABLE INCOME

Married Filing

Jointly

Single

Current

Bill

Over

But Not Over

Over

But Not Over

3. 0%

3. 0%

$ 0

$ 20,000

$ 0

$ 10,000

5. 0%

5. 0%

20,000

500,000

10,000

265,000

6. 0%

500,000

600,000

265,000

318,000

6. 5%

600,000

750,000

318,000

397,500

7. 5%

Over $ 750,000

Over $ 397,500

TAX RATES

Head of

Household

Married Filing

Separately

Current

Bill

Over

But Not Over

Over

But Not Over

3. 0%

3. 0%

$ 0

$ 16,000

$ 0

$ 10,000

5. 0%

5. 0%

16,000

400,000

10,000

250,000

6. 0%

400,000

480,000

250,000

300,000

6. 5%

480,000

600,000

300,000

375,000

7. 5%

Over $ 600,000

Over $ 375,000

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

97 & 98 – Delay in Scheduled Income Tax Reductions for Single Filers

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 2. (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 2: PERSONAL EXEMPTIONS FOR SINGLE FILERS

Tax Year(s)

Maximum Personal Exemption

(AGI)

Personal Exemption

Reduction Threshold (AGI)

Current

The Bill

2008

Through 2011

$ 13,000

$ 26,000

2009

2012

13,500

27,000

2010

2013

14,000

28,000

2011

2014

14,500

29,000

2012 and after

2015 and after

15,000

30,000

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 3 shows qualifying personal credit income ranges for single filers under current law and the bill.

TABLE 3: PERSONAL CREDITS FOR SINGLE FILERS

Tax Year(s)

Qualifies for 1% to 75% Personal Credit (AGI)

Current

The Bill

Over

But Not Over

2008

Through 2011

$ 13,000

$ 56,500

2009

2012

13,500

58,500

2010

2013

14,000

60,500

2011

2014

14,500

62,500

2012 and after

2015 and after

15,000

64,500

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

CORPORATION TAX

77 & 86 – Surcharge

The bill imposes a 25% 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.

76, 78 & 79 – Exemptions for Domestic International Service Companies (DISCs)

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 sales of tangible personal property to 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.

80 – Tax Credit for Donating Open Space

The law provides a credit against the corporation tax for donations or discounted sales of open space land or interests in land to the state, a political subdivision, or a nonprofit land conservation organization when the land will be permanently preserved as open space. The credit equals 50% of the (1) donated land's market value at its highest and best use or (2) value of the discounted sales price of the land or interest in the land.

The bill extends the period for which a company may carry forward unused credits from 15 to 25 years. As under current law, the carry-forward applies only to credits allowed for any tax year starting on or after January 1, 2000.

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

87 – Combined Reporting Preference Tax

The bill increases the maximum preference tax for groups of companies filing combined corporation tax returns from $ 250,000 to $ 400,000.

By law, any company subject to the Connecticut corporation tax and that is included with one or more affiliated corporations in a consolidated federal income tax return can choose to file a combined Connecticut return as well. The DRS commissioner may also require a corporation to file a combined return with its affiliates, under certain circumstances. In either a case, a corporate group filing a combined Connecticut corporation tax must pay a supplemental tax in addition to that calculated using the group's combined net income or capital base. This so-called “preference tax” is the difference between the sum of the amounts that would have been due if each member of the corporate group filed separately and the amount due under the combined return, but no more than a maximum amount. The bill increases this maximum amount from $ 250,000 to $ 400,000.

EFFECTIVE DATE: July 1, 2009

78 & 96 – FEDERAL DOMESTIC PRODUCTION ACTIVITY DEDUCTION

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.

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.

81-85 & 104 - FILM AND DIGITAL ANIMATION PRODUCTION AND INFRASTRUCTURE INVESTMENT TAX CREDITS

Credit Administration

The law establishes tax credits against the corporation and insurance premium taxes for film and digital animation production and infrastructure investment related to both. The bill transfers the administration of the credits from the Connecticut Commission on Culture and Tourism (CCCT) to the Department of Economic and Community Development (DECD). It transfers to DECD the CCCT's powers and duties concerning digital media and motion picture promotion activities. It also requires state agencies and institutions that contract for digital media or film productions to send copies of their requests for proposals to DECD, rather than CCCT.

Interim Film Production Tax Credit. The bill eliminates a company's ability to obtain an interim film production tax credit. It does this by eliminating the process that allows a company to apply for a tax credit voucher while a production is in progress, starting three months after submitting its eligibility application, for its expenses up to that time. It continues to allow a production company to apply for and receive credits on an annual basis or after it incurs its last production expense.

Cost Certification. Currently, a film production or digital animation company must provide independent certification of the amount of its production expenses and costs when it applies for a tax credit voucher. The bill requires that an audit professional, which the company chooses from a list DECD compiles, provide the independent certification.

Reporting Requirement. Currently, CCCT must report to the General Assembly every two years on its digital media and movie production promotion activities, the economic impact of all productions, and the impact of each state-assisted production. The bill transfers the reporting requirement to DECD and requires that DECD report annually, starting by January 1, 2010. It eliminates a requirement that the report include the impact of each state-assisted production and instead requires that it include (1) an analysis of all three credits and (2) for each project or production issued a tax credit, (a) a description of the project, (b) the amount of the credit, and (c) the total production expenses or costs the taxpayer issued the credit incurred in the state.

Eligible and Ineligible Production Expenses

Minimum Qualifying Expenditure. Under current law, a company is eligible for the film or digital animation production tax credit if it incurs at least $ 50,000 in eligible production expenses in the state. For income years starting January 1, 2009, the bill increases the minimum expenditure for both credits to $ 1 million.

In- and Out-of-State Expenditures. The bill requires, for the film production tax credit, that the company (1) conduct at least 50% of its principal photography days and (2) incur at least 50% of its postproduction costs within the state.

Current law allows a company to count 50% of the production expenses it incurs outside the state and 100% of the expenses it incurs in the state towards the film production credit if they are used in the state. This applies from January 1, 2009 to January 1, 2012, after which no out-of-state expenses will count towards the credit. The bill moves up the phase-out date, to January 1, 2010, for out-of-state production expenses.

Star Salaries. Under current law, the first $ 15 million paid to a single person, or the person's representative, for services on a film or digital media production counts as a credit-eligible expense. Anything over this amount does not. Starting January 1, 2009, the bill limits credit-eligible compensation for all star talent featured in a film or digital media production to $ 20 million in the aggregate.

Audit Costs. The bill excludes any costs related to an independent audit of film or digital animation production project costs and expenses that DECD requires before certification.

Film and Digital Animation Infrastructure Investment Tax Credit

Under current law, the credit amounts for infrastructure investments in the film and digital media industry depend on the project's cost. Currently, projects costing at least (1) $ 15,001 qualify for a 10% credit, (2) $ 150,000 qualify for a 15% credit, and (3) $ 1,000,000 qualify for a 20% credit.

Starting January 1, 2009, the bill makes the credit a flat 20% and increases the minimum qualifying expenditure to $ 5 million. The bill also requires that the project be 100%, rather than at least 60%, complete before it can receive a tax credit voucher.

EFFECTIVE DATE: July 1, 2009 and applicable to income years starting on or after January 1, 2009. The repeal of statutes to conform to the transfer of the film responsibilities from CCCT to DECD take effect upon passage.

88-90 – CIGARETTE TAX

The bill increases the cigarette tax by 75 cents, from $ 2 to $ 2. 75 per pack of 20 (from 10 cents to 13. 75 cents per cigarette), starting July 1, 2009.

The bill also imposes a 75-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 June 30, 2009. By August 15, 2009, 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: The cigarette tax increase is effective July 1, 2009 and applicable to cigarette sales on or after that date. The floor tax is effective on passage.

91 & 92 – TOBACCO PRODUCTS TAX

The bill increases the tobacco products tax from 20% to 27. 5% of the wholesale price and the tax on snuff tobacco from 40 cents to 55 cents per ounce. The tobacco products tax applies to cigars, cheroots, pipe tobacco, snuff, and similar products.

The bill imposes the same “floor tax” on inventory as the cigarette floor tax above, except that the rate is 7. 5% on the wholesale price of untaxed tobacco products and 15 cents per ounce or a proportional share of fractional amounts of snuff that distributors or unclassified importers have in their inventories.

EFFECTIVE DATE: July 1, 2009 and applicable to sales on and after that date. The floor tax is effective on passage.

93 – ESTATE TAX SURCHARGE

The bill imposes a 30% estate tax surcharge on the taxable estates of those who die in 2009, 2010, or 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.

94 – USE TAX TABLE

The bill requires the DRS commissioner to include a use tax table on state income tax forms. The table must show the Connecticut use tax rate (6% for most items) and the total taxes that would be due for various amounts spent.

By law, when someone buys a taxable item or service for use in Connecticut and does not pay sales tax to the retailer at the time of the purchase, the buyer must remit the equivalent use tax directly to DRS. Use tax is generally remitted along with personal income tax payments.

EFFECTIVE DATE: July 1, 2009

99 TIRE FEE

The bill requires retailers of motor vehicle tires to pay a $ 3 fee for each tire they sell. Such retailers must register with the DRS commissioner and submit quarterly returns, starting with the quarter beginning July 1, 2009. Returns are due by the last day of the month following the end of each quarter. Fees not paid when due are subject to a penalty of 10% or $ 50, whichever is greater, and interest of 1. 25% per month or part of a month until paid. Tire fee revenue must be deposited in the General Fund.

The bill requires the DRS commissioner to distribute tire fee return forms widely in the state but specifies that failure to receive a form does not excuse a person from the obligation to pay the fee. The bill applies the administrative, audit, deficiency assessment, and appeal procedures to the tire fee as already apply to admissions and dues taxes.

EFFECTIVE DATE: Upon passage

100 – PLAN TO SELL STATE ASSETS

The bill requires the state treasurer and the OPM secretary jointly to establish a plan to sell state assets to raise net general revenue of up to $ 10 million for FY 11 and $ 102. 5 million for FY 12. They must finish the plan and provide it to the chairpersons of the Appropriations and Finance, Revenue and Bonding committees by February 3, 2010.

EFFECTIVE DATE: July 1, 2009

101 – TRANSFERS FROM THE BUDGET RESERVE FUND

The bill requires the state treasurer to transfer from the Budget Reserve Fund to General Fund revenue, (1) $ 461. 1 million for FY 10 on July 1, 2009 and (2) $ 920. 7 million for FY 11 on July 1, 2010.

EFFECTIVE DATE: Upon passage

102 & 103 – ECONOMIC RECOVERY NOTES

The bill authorizes the state to issue economic recovery notes to fund (1) the FY 09 General Fund deficit, (2) the interest payable or accrued on the notes through June 30, 2011, and (3) the costs of their issuance. The notes are state general obligations and must mature before July 1, 2016. The bill exempts the debt attributable to the notes from the statutory limit on state General Fund-supported debt (see BACKGROUND).

The bill requires the comptroller to certify the FY 09 deficit amount to the treasurer “promptly” after the bill's passage based on her most recent monthly report of the state's fiscal condition. The comptroller's certification provides conclusive evidence of the amount of economic recovery notes the treasurer can issue under the bill. When the comptroller knows the final deficit, she must certify that amount to the treasurer. If the final amount is greater than the initial amount certified, the bill authorizes the treasurer to issue additional notes to cover the difference.

The treasurer must issue the notes on or after the bill's passage and deposit the proceeds from their sale in the General Fund. In any determination of the General Fund's position for FY 10, the comptroller must reflect the amount of the note proceeds funding the FY 09 General Fund deficit, if the notes have been issued before the determination.

The bill exempts interest on, and gains from the sale of, the notes from all taxes imposed by the state or under its authority, except estate or succession taxes. It also requires the treasurer to structure the notes so their interest is excluded from federal taxes if that is appropriate or necessary to improve the notes' marketability.

The bill makes the notes legal investments for banks, insurance companies, fiduciaries, and public bodies and allows public officers to accept them for any purpose for which they may receive or deposit state notes.

Finally, the bill incorporates and applies to the economic recovery notes various statutory provisions relating to issuing state general obligation bonds and notes. These concern, among other things, the treasurer's authority to make agreements and promises relating to issuing and repaying the notes, and the procedure for, and state defenses in, any bond holder lawsuit under contracts, agreements, and covenants relating to the notes.

EFFECTIVE DATE: Upon passage

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:

1. derive at least 95% of its gross receipts during the tax year from qualified exports;

2. at the end of the tax year, have at least 95% of its assets as qualified export assets;

3. have only one class of stock with a par or stated value of at least $ 2,500 on each day of the tax year;

4. maintain separate books and records;

5. not be a member of any controlled group of which a foreign sales corporation (FSC) is also a member (a FSC is an affiliate of a U. S. company that is incorporated in a qualifying foreign country and serves as an agent for the U. S. exporter);

6. have a tax year that conforms to the tax year of its largest shareholder in terms of voting power; and

7. elects to be treated as an IC-DISC for the tax year.

Statutory Debt Limit

State law limits the amount of state General Fund-supported debt to 1. 6 times the net General Fund tax receipts the Finance, Revenue and Bonding Committee projects for the fiscal year in which the legislature authorizes the debt. Certain types of debt are excluded from the debt limit calculation, including debts incurred for federally reimbursable public works projects, assets in debt retirement funds, and debt incurred in anticipation of revenue and some other purposes.