Finance, Revenue and Bonding Committee

JOINT FAVORABLE REPORT

Bill No.:

SB-932

Title:

AN ACT MAKING CHANGES TO VARIOUS TAX STATUTES.

Vote Date:

4/2/2009

Vote Action:

Joint Favorable Substitute

PH Date:

2/23/2009

File No.:

SPONSORS OF BILL:

Finance, Revenue and Bonding Committee

REASONS FOR BILL:

New title and language

FINANCE SUBSTITUTE LANGUAGE:

The bill increases the income tax on 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 6.0% - 7.95%.

The bill lowers the thresholds for phasing out the property tax credit against the income tax by 25% for the 2009 tax year and 75% for the 2010 tax year.

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.

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.

The bill suspends the sales tax free week for the 2009 and 2010 calendar years.

The bill repeals specific sales tax exemptions as shown:

STATUTE

EXEMPTION

12-412 (71)

Commercial printing machinery, equipment, tools, materials, and supplies

12-412i

Partial exemption (50%) for materials, tools, fuel, machinery, and equipment used in manufacturing tangible personal property to be sold

12-412 (63)

Items sold exclusively for agricultural production by a farmer engaged in the business of farming

12-412 (40)

Commercial fishing boats and machinery and equipment for use in them

12-412 (21) & (22)

Items or services used to operate waste treatment or air pollution control facilities

12-412 (90)

Water company purchases: Items or services used by a water company in maintaining, operating, managing, or controlling a well, water body, or distributing plant or system to supply water to at least 50 consumers

12-412 (58)

Personnel, management, or research services when both the seller and recipient are participating in a joint venture for research and new product development

No statute

Tax preparation

 

Pilot Credit for E-commerce donations to higher education

 

Drug testing services

12-412 (91)

Protective clothing or equipment an employee wears or uses at work

12-407 (a) (37) (N)(i)

Motor vehicle parking: Non-metered parking in seasonal lots with 30 or more spaces provided by a nonprofit charitable hospital, nursing home, rest home, residential care home, certain acute-acre for-profit hospitals, or a nonprofit organization exemption from federal income tax

12-407 (a) (37) (N) (ii)

Motor vehicle parking: Non-metered motor vehicle parking spaces in an employer-operated lot owned or leased for a minimum of 10 years and operated for the exclusive use of its employees

12-407 (a) (37) (N) (iii)

Motor vehicle parking: Airport valet parking

12-407 (a) (37) (N) (iv)

Motor vehicle parking: Space in state-owned or operated or municipally operated railroad parking facilities located in areas not meeting federal Clean Air standards for ozone

12-412 (109)

College textbooks and related workbooks

12-412 (110)

Passenger vehicles with EPA-estimated highway mileage ratings of 40 miles per gallon or more (expires July 1, 2010)

12-412 (117)

Solar electricity generating, water, and space heating systems and geothermal resource systems and related equipment and service

12-412 (31)

Printed material manufactured in Connecticut for use outside the state

12-412 (44) (A)

Taped or filmed radio or t.v. programs and materials that become components for such programs, if the programs (a) will be broadcast to the public by a radio or t.v. station or (b) used for accredited medical or surgical training

12-412 (44) (B)

Motion picture or video production or sound recording equipment to become part of master tapes, records, or videotapes used for commercial entertainment, advertising, or educational purposes

12-412 (44) (C)

Equipment, including antennas, that radio or t.v. stations use to broadcast programs to the general public

12-412 (50)

Lease or rental of movies for display by a theater owner or operator

12-407 (a) (37) (S)

Sales agent services: Consignment services (other than auctioneer services) for someone selling (a) works of art or (b) clothing footwear other than that for specialized athletic or protective use or accessories, such as jewelry

12-412 (89)

Machinery, equipment, tools, materials, supplies, and fuel used directly in the biotechnology industry

12-407 (38)

Media payroll services

No statute

Car washes

 

Services provided by an off-duty police officer or firefighter

12-412 (43)

Replacement parts for machinery sold to a business located in an enterprise zone

12-412 (53)

Disposable pads for incontinency

12-412 (52)

Cloth or fabric for noncommercial home sewing of clothes

12-412 (108)

Child car seats

12-412 (72)

Machinery, equipment, tools, materials, and supplies for typesetting, color separation, finished copy and similar products

12-412 (5)

Goods or services sold to or by nonprofit charitable hospitals, nursing homes, residential care homes

12-412c

Mobile and pre-fabricated homes

 

Trade-in of certain construction equipment

 

Licensed motor vehicle dealers

12-412 (74)

Computer and data processing services rendered under certain specified circumstances and during specified time periods

12-407(a) (37) (BB)

Services of a licensed massage therapist or electrologist

12-407 (a) (37) (J) (ii)

Training services for businesses provided by colleges and universities accredited by the Board of Governors of Higher Education

12-412 (111)

Specially formulated gum, inhalants, or similar products designed to help someone stop smoking

12-412 (102)

Bicycle helmets

12-412 (82) & (83)

Commercial motor vehicles or motor buses when, for at least one year after purchase, a minimum of 75% of their revenue comes from out-of-state or interstate trips

12-412 (64)

Equipment for producing or cleaning computer discs and for maintaining climate-controls need for those processes

12-412 (65)

Metal casting foundry purchases of molds, dies, patterns, and sand handling equipment

12-412 (66)

Pattern shop sales of molds, dies, and patterns to metal casting foundries or their customers for use in foundries, and pattern shop purchases in connection with such sales

12-412 (88)

Machinery, equipment, tools, and materials exclusively for processing photographic film and paper

12-412 (95)

Items or services for operating a DEP-certified waste-to-energy facility

12-412 (104) (A)

Calibration services for manufacturing production machinery, equipment, or instrumentation

12-412 (104) (B)

Compliance practices and services associated with quality management and quality assurance standards created by the International Organization of Standards

 

Leased and professional contract employees

 

Amusement and recreation services

12-412 (113)

Materials, tools, fuel, machinery, and equipment used in a fuel cell manufacturing facility

12-407(a)(27)

Non-cable communications services

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

The bill bars companies from using the federal tax deduction for domestic production activity when determining net income for purposes of the state corporation tax.

Federal tax law allows corporations 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 2009 and 9% for 2010 and after (Internal Revenue Code 199).

The bill reduces the limit on the total value of corporation tax credits allowed to any company for any income year from 70% of its tax liability without the credits for the year to 65% the income year starting January 1, 2009 and to 50% for the income year starting January 1, 2010.

The bill eliminates two exemptions from the corporation business tax relating to domestic international sales corporations (DISCs) and foreign sales corporations (FSCs). It (1) extends the tax to qualifying DISCs that are currently exempt and (2) eliminates an allowable income deduction for dividends a company receives from DISCs or a foreign sales corporations (FSCs)

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

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 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 dates, 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.

FISCAL IMPACT SUMMARY:

The bill is anticipated to result in General Fund revenue gain of $1.653 billion in FY 10 and $1.602 billion in FY 11.

RESPONSE FROM ADMINISTRATION/AGENCY:

Robert Genuario, Secretary, Office of Policy and Management is opposed to increasing taxes paid by state residents at a time when residents of this state can not afford higher taxes.

Joan McDonald, Commissioner, Department of Economic and Community Development opposes adding “additional burdens to Connecticut businesses.”

NATURE AND SOURCES OF SUPPORT:

Nancy Wyman, State Comptroller believes “Connecticut would be wise to consider” eliminating or capping business tax credits in the current economic times, and recommends investigating the effectiveness of all expenditures.

Mark Murphy, Fiscal Policy Analyst, AFSCME Council 4, states that many tax expenditures are well-intentioned but inefficient means of implementing policy. Typically, once a tax exemption has been enacted, it carries over from year to year in the tax code without any formal, scheduled review. AFSCME also supports a more progressive income tax structure.

Jane McNichol, Executive Director, Legal Assistance Resource Center of Connecticut, Inc. supports taxing certain services because “much more than in the past, our commerce is based on the sale of services and our failure to tax services means that we forego significant potential revenue from the sales tax.”

Dr. Andrew Salner, Director of the Hartford Hospital Cancer Center; Dr. Pat Checko, Chairman of the MATCH Coalition; Joni Czajkowski Senior Director of Government Relations for the American Heart Association; The American Cancer Society; American Lung Association; and Ady Barkan support an increase in cigarette tax, as fewer smokers would lead to reduced long-term health care costs and healthier lives.

Connecticut Working Families; Stephen Adair, PhD; the Connecticut Association of Nonprofits; and the Connecticut Association for Human Services (CAHS) supports a more progressive income tax structure. CAHS states it would help Connecticut “invest in its families, workforce, and infrastructure so that we come out stronger on the long run” and make the tax structure more equitable.

Connecticut Voices for Children supports a more progressive income tax structure as well as limiting or eliminating tax expenditures, including business tax credits, as it would increase “revenues that support critical needs in other areas of the state budget.”

NATURE AND SOURCES OF OPPOSITION:

Hank Teskey, Director of Taxes, Electric Boat Corporation opposes extending the sales tax to vendors who provide services to Electric Boat. This cost puts Electric Boat at a competitive disadvantage and could potentially increase the cost of future submarines.

Arthur Renner, Executive Director of Connecticut Society of Certified Public Accountants and Anthony DeLucia of DeLucia & Company, LLC oppose making Connecticut one of only a minority of states that impose sales and use tax on accounting services. Various regulatory agencies require businesses to obtain accounting services. If we tax individuals and businesses on the services required to file returns, which generate revenues, at both the federal and state level, is troublesome.

Gary Kittredge of Precision Machine Tools opposes extending the sales tax to virtually all professional and business services. Nine busy manufacturing facilities in Northwestern, CT alone will be directly and negatively affected.

Harry Im State Tax counsel for United Technologies (UT) opposes repealing or significantly limiting tax exemptions or credits, as it “penalizes precisely those companies that should be supported during this crisis.” Only companies who invest in the state “in the exact manner the legislature intended to incentivize” will be penalized. UT also opposes imposing the sales tax upon professional, insurance, and personal services. It would especially harm in-state headquartered companies, who would pay for “legal, accounting, investment advisory and other professional services . . . regardless of where the services are actually performed.”

Patrick Caruso, Associated Refuse Haulers; Thomas D. Kirk, Connecticut Resources Recovery Authority; Jonathan Bilmes, Bristol Resource Recovery Facility Operating Committee oppose the removal of tax credits that they count on to purchase new equipment. Equipment needs to be ordered at least 4 to 6 months prior to acquisition. Repeal of those and other exemptions would lead to higher costs which would be passed on in the form of higher trash disposal fees.

Joseph Brennan, Connecticut Business and Industry Alliance (CBIA) opposes requiring companies needing to hire an accounting firm to pay sales tax on that service and numerous other services that employers pay for on a routine basis. If a business was located just over the Connecticut border, that business would not incur the added increase in the cost of such services. Measures such as this are bad for Connecticut because we compete in a global economy. Companies unable to incur the added costs must either invest less in Connecticut or offer fewer jobs. CBIA opposes removing tax credits for fuel cells and other areas of research and development, “the very industries that many legislators believe to be the growth industries.” CBIA opposes the restructuring of personal income tax levels as businesses “set up as pass-through entities pay personal income tax on the income generated by the business.”

Michael J. Riley, President, Motor Transport Association of Connecticut, Inc;

Gerald R. Beauton of New England Truck Sales and Jim Fleming, President, Connecticut Automotive Retailers Association oppose the removal of tax exemptions, as they lead to the repeat taxation of products as they make their way through a variety of transactions on the way to the final consumer.

Anthony Waggoner, Senior Vice President and Controller, ESPN Inc. opposes the removal of sales tax exemptions. ESPN makes large expenditures for technical broadcasting equipment, programming rights and other materials used in creating ESPN's television network. The production is ultimately distributed by retailers, and to consumers who pay both sales taxes and gross earning taxes on their subscriptions, just as retail customers do for physical products. ESPN is not a retailer. Producing a program is analogous to manufacturing physical products, and therefore taxes should be levied on ultimate consumption and not on the process that leads to that consumption.

Anthony Setaro, President, Connecticut Car Wash Association; Paul Ferruolo, Mr. Sparkle Car Wash; Alan Tracy, Magic Minit Car Wash; Daniel Petrelle, Splash Car Wash oppose the tax on car washing services. The industry is very competitive and most, if not all, car wash operators are small, family owned businesses that employ many entry level workers. In 1993 the exemption was given because it was an unworkable tax that caused more confusion and unfairness for the limited amount of tax revenue it generated.

J. Kevin Kinsella, Vice President, Hartford Hospital; David W. Benfer, President & CEO, Hospital of Saint Rafael; Richard A. Brvenik, President & CEO, Windham Community Memorial Hospital; John Gleckler, Sr. Vice President & CFO, St. Vincents Medical Center; Martin J. Gavin, President & CEO, Connecticut Children's Medical Center; Carolyn Salsgiver, Sr. Vice President of Planning and Marketing, Bridgeport Hospital; Stephen Frayne, Sr. Vice President, Connecticut Hospital Association; David A. Whitehead, Vice President, Planning, Connecticut Hospital Association; Peter J. Karl, President & CEO, Eastern Connecticut Health Network; R. Christopher Hartley, Sr. Vice President, St. Francis Hospital and Medical Center oppose the elimination of tax exemptions for hospital purchases. The elimination would badly hurt Connecticut Hospitals and their ability to provide quality care. In addition, it would divert much needed dollars from highly vulnerable health care institutions when the demand for services from the uninsured and underinsured is on the rise. Hospitals also contribute to the state's economy as major employers, offering jobs at all skill levels.

Daniel D. Moffa, Vice President of Finance at H&T Battery Components USA, Inc., Christina Lavieri, Vice President, Sterling Engineering Corp.; Peter Kent, CEO, Bicron Electronics Company; Mike Fabiani, Director of Operations, ThermoSpas;

Marshall R. Collins, Marshall R. Collins & Associates; Doug Devnew, Vice President Finance & Administration, TRUMPF; Jim O'Brien, Operations Lead, Monsanto Mystic Research Center opposes the removal of the sales tax exemption on the purchase of manufacturing equipment and spare parts. It will put Connecticut companies at a disadvantage to manufacturers in other states who do not place a sales tax on manufacturing equipment. The elimination of key tax exemptions for manufacturers adds roadblocks to economic recovery in Connecticut. Monsanto adds that utilizing sophisticated machinery and robotics requires frequent acquisitions to keep current with the technological needs.

David Radka, Connecticut Water Works Association states that private water companies are already subject to many additional costs that municipal and regional water suppliers are not. These additional costs represent about 25 cents on the dollar for the private company, increasing the cost of providing services and ultimately resulting in higher rates for customers.

Richard A. Wisot, Vice President, Proliance International, Inc.; Samuel J. Massameno, President & CEO, K-Tech International; Bob Brinkerhoff, Plant Manager, Tri Town Precision Plastics; Eric Albert, President, Albert Bros., Inc.; William Waseleski, President, Century Spring Mfg.; Richard Leone, CEO, COCC, Inc.; Richard & Jeffrey Stathers, Owners, True Position Manufacturing, LLC; Richard H. Wheeler, President, ABA-PGT, Inc.; Paul A. Suzio, President & COO, Bridgeport Fittings; Larry J. Becker, President, Reidville Hydraulics & Mfg; Donna Noonan, Managing Member, American Metal Crafters, LLC; Arthur McCauley, President, Norwalk Compressor Co.; Christian Queen, President, Highland Manufacturing; Denise Gauvreau, Sales/Service Manager, Point Lighting Corp.; Carl N. Siemon, President, The Siemon Company; Roger F. Joyce, Executive Vice President, Bilco Company; Elizabeth LaBonia, President & CEO, Platt and LaBonia Company; Stephen Pretto, Vice President of Operations, Goldenrod Corporation; William Spangler, President, Esico-Triton, International; John J. Gowac, Sr. Vice president/Treasurer, Durham Manufacturing Company; Richard J. Carlo, Director of Finance, Eastern Bag & Paper Co.; Kate Hampford Donahue, President, Hampford Research Inc.; Kevin A. North, President, Talcott Corporation; Grant Western, Executive Director and John Johnson, Legislative Chair, Connecticut Marine Trades Association; Robert Macca, Legislative Chair, CT-PHCC; Lisa Hutner, Executive Director, Independent Electrical Contractors of New England, Inc.; Rick Willard, Chairman, NFIB, owner, Griswold, Willard & Strong; Jack Traver, Jr., President, Traver IDC; Paul Filson, Director, SEIU's Connecticut State Council; Norm Ferron, Managing Partner, Ferron Mold and Tool, LLC; Marc T. Giles, President & CEO, Gerber Scientific; Benjamin M. Thomas, President, New England Machine Tools, Inc.; Lawrence F. Clark, Chairman, Sonalysts; Howard Goldfarb, President, Leed Himmel Industries, Inc.; Karen H. Brinker, President, Alphagraphics; Nucor Steel Connecticut: Selma Notaro, Purchasing Supervisor, Elizabeth Rivera, Credit Supervisor, Curt Beerman, Operations Manager, Rolf Kuhn, Controller, Tracy Guyette, Human Resource Supervisor; Andy Markowski, Connecticut State Director, NFIB all oppose the removal of tax exemptions which would result in hardship for the state's small businesses and have long-term economic fall-out.

Leigh Walton, Vice President of State Government Affairs, Pitney Bowes, Inc. opposes removing tax exemptions and limiting tax credits. The tax structure and targeted tax incentives offered by Connecticut are a significant factor in the decision to locate certain operations. The cost of doing business and cost of living for employees in Connecticut is high and many of these incentives help companies remain and invest in Connecticut. Predictability and consistency in tax policy are important when considering long-term multi-million dollar investments in facilities and people. Proposals which increase business costs or reduce or eliminate incentives that support long term investments multiply the challenges business face. Pitney Bowes supports the Research and Development tax credit as a “good example of an incentive that has helped to foster a pipeline of research activity among a number of companies and our higher education community. “

Stan Sorkin, President, Connecticut Food Association; John Singleton, Director of Communications, Reynolds American; The New England Convenience Store Association (NECSA); Brian Shapiro; Gregg Edwards, Center for Policy Research of New Jersey; Anne Flint, Retail Purchasing Manager, Cumberland Farms; Kevin Pimentel, Xtramart Convenience Stores testified that an increase in an excise tax such as the cigarette tax would lead to a decline in store sales and tax collection, and would be a regressive tax. NECSA and the Independent Connecticut Petroleum Association are concerned about the loss of profits to small convenience store owners.

The Gasoline and Automotive Service Dealers of America, Inc. opposes an increase to cigarette taxes. “Before increasing taxes further to the cigarette category . . . fundamental tax fairness calls for spreading the pain.”

UIL Holdings opposes a 30% corporation tax surcharge as it “would cause further harm to the State's already fragile economy” and they would have to raise electric rates to cover the increased tax expense.

The Connecticut Plumbing, Heating and Cooling Contractors Association and the Connecticut Alarm and Systems Integrators Association testified that a 30% surcharge on the corporate income tax will undermine economic recovery.

The Quinnipiac, Greater Danbury, East of the River, Milford, and the Northwest Connecticut Chambers of Commerce, The Connecticut Messenger Courier Association, and the Lumber Dealers' Association of Connecticut say that raising taxes risks pushing the state further into recession.

Paul Lambdin, President, HealthNet of the Northeast; AT&T Connecticut; Gerry Noonan, Connecticut Bankers Association; Insurance Association of Connecticut; Patrick Hayden, President, Donham Craft, Inc.; Gary L. Smith, Sr. Vice President, Travelers; Oz Griebel, Metro Hartford Alliance; Joseph Brennan, CBIA; Kate Kiernan-Pagani, Asst. Vice president & Counsel, Mass Mutual Financial Group; The American Insurance Association; Tracy O'Brien, Owner, Marvin Display; Hank Tesky, Director of Taxes, Electric Boat Corp oppose restricting the ability of companies to generate and use tax credits. It breaks the commitment made to business who undertook activities that the state wanted to foster, it places Connecticut business at a disadvantage by increasing the cost of doing business, and it discourages capital investment in Connecticut. Businesses that made the commitment to Connecticut did so in good faith that the state would maintain its commitment, failure to do so will curtail future investment decisions.

The American Insurance Association opposes the limiting of tax credits, as it would “impose new and unprecedented burdens on insurers and the insurance marketplace.” It would “frustrate legitimate investor expectations” and “provide a powerful disincentive to future corporate reliance on any quid pro quo for investment in the State.

Electric Boat Corporation says that “the research and development credit provide incentives to companies to invest in Connecticut. . . A limit or moratorium on these credits will hurt the very companies that invest in the buildings, equipment and people of our state.”

Reported by: Finance, Revenue and Bonding Committee Staff, Office of Fiscal Analysis.

Date: 4/8/09