OLR Bill Analysis

sSB 946

AN ACT CONCERNING REVENUE ITEMS TO IMPLEMENT THE BIENNIAL BUDGET.

SUMMARY:

This bill makes various changes to state taxes and fees.

It makes several changes to the personal income tax, including:

1. increasing, from 6.7% to 6.99%, the marginal income tax rate for certain higher income filers;

2. establishing an additional 2% income tax on federally taxable capital gains for such filers;

3. delaying by three years scheduled income tax reductions for single filers;

4. fully exempting federally taxable military retirement pay from the state income tax; and

5. delaying by two years the scheduled increase in the earned income tax credit (EITC).

The bill also makes a number of changes to the state's business taxes and fees. Among its changes to the corporation income tax, the bill:

1. imposes a new combined reporting requirement for corporations meeting certain criteria;

2. extends the 20% corporation income tax surcharge for two additional years, to the 2016 and 2017 income years;

3. imposes a temporary 10% surcharge for the 2018 income year; and

4. limits the amount of net operating loss (NOL) deduction and business tax credits corporations may use to reduce their tax liability.

Additionally, the bill (1) extends the temporary cap on the maximum insurance premium tax liability that an insurer may offset through tax credits, (2) extends the temporary moratorium on issuing film and digital media production tax credits, (3) imposes a cap on the use of tax credits to reduce hospital tax liability, and (4) cuts the business entity tax in half. It also increases certain business filing fees for pass-through entities.

Beginning October 1, 2015, the bill restructures the sales and use tax by (1) splitting the 6.35% rate into a 5.85% “state revenue tax” and 0.5% “municipal revenue tax” and (2) directing the revenue from the municipal revenue tax to the municipal revenue sharing account. It lowers the state revenue tax from 5.85% to 5.35% beginning July 1, 2016. It also (1) extends the tax to a range of professional services, (2) increases the rate on computer and data processing services, (3) eliminates the exemption for clothing and footwear costing less than $50, and (4) limits the exemption for clothing and footwear during “sales-tax-free-week.”

The bill also:

1. establishes a mechanism for diverting projected surpluses in certain tax revenues to the Budget Reserve (i.e. “Rainy Day”) Fund;

2. establishes a framework for regulating the manufacture and sale of electronic nicotine delivery systems and vapor products;

3. allows the Connecticut Lottery Corporation to offer Keno games;

4. allows certain alcohol permittees to sell growlers of beer;

5. modifies the rental surcharge that applies to car, truck, and machinery rentals;

6. transfers funds from various accounts to the General Fund;

7. increases license renewal fees for various Department of Public Health (DPH) licensed professionals; and

8. requires Connecticut Innovations to enter into a tax increment financing (TIF) agreement with the city of Hartford.

EFFECTIVE DATE: July 1, 2015, unless otherwise noted below.

§§ 1-6 — INCOME TAX

Marginal Rate Increase (§ 1)

The bill increases, from 6.7% to 6.99%, the marginal tax rate for taxable incomes over (1) $1,000,000 for joint filers, (2) $500,000 for single filers and married people filing separately, and (3) $800,000 for heads of household. The bill also increases the flat income tax rate for trusts and estates from 6.7% to 6.99%.

Table 1 shows the marginal tax rates and income brackets under current law and the bill.

Table 1: Current and Proposed Tax Rates and Brackets

CT TAXABLE INCOME

TAX RATES

Married Filing Jointly

Single

Over

But Not Over

Over

But Not Over

Current Law

Bill

$0

$20,000

$0

$10,000

3.00%

3.00%

20,000

100,000

10,000

50,000

5.00%

5.00%

100,000

200,000

50,000

100,000

5.50%

5.50%

200,000

400,000

100,000

200,000

6.00%

6.00%

400,000

500,000

200,000

250,000

6.50%

6.50%

500,000

1,000,000

250,000

500,000

6.70%

6.7%

Over $1,000,000

Over $500,000

6.99%

CT TAXABLE INCOME

TAX RATES

Head of Household

Married Filing Separately

Over

But Not Over

Over

But Not Over

Current Law

Bill

$0

$16,000

$0

$10,000

3.00%

3.00%

16,000

80,000

10,000

50,000

5.00%

5.00%

80,000

160,000

50,000

100,000

5.50%

5.50%

160,000

320,000

100,000

200,000

6.00%

6.00%

320,000

400,000

200,000

250,000

6.50%

6.50%

400,000

800,000

250,000

500,000

6.70%

6.70%

Over $800,000

Over $500,000

6.99%

Benefit Recapture (§ 1)

By law, taxpayers whose annual Connecticut adjusted gross income (CT AGI) exceeds specified thresholds are subject to a “benefit recapture” which eliminates the benefits they receive from having a portion of their taxable income taxed at lower marginal rates. These taxpayers must add specified amounts to their tax liability.

The bill establishes an additional benefit recapture schedule to reflect the new marginal rate and income bracket. Table 2 shows, for each filer type, the (1) CT AGI starting point for the additional recapture amounts, (2) CT AGI intervals and the recapture amount to be added at each interval, and (3) maximum recapture amount taxpayers must add to their tax liability. These amounts apply in addition to the benefit recapture amounts under existing law.

Table 2: Additional Benefit Recapture Amounts

 

Married Filing Jointly

Single/ Married Filing Separately

Head of Household

Starting point: (CT AGI) over

$1,000,000

$500,000

$800,000

Recapture amount

$100 per $10,000 of CT AGI over starting point

$50 per $5,000 of CT AGI over starting point

$80 per $8,000 over CT AGI starting point

Maximum additional recapture amount

$2,900

$1,450

$2,320

Capital Gains Surcharge (§ 1)

The bill establishes an additional 2% income tax on capital gains income for those with taxable incomes over (1) $1,000,000 for joint filers, (2) $500,000 for single filers and married people filing separately, and (3) $800,000 for heads of household.

The bill defines capital gains as the federally taxable net gain from the sale or exchange, or other taxable transaction, of certain capital assets and property. Specifically, it applies to the federal net gain, after allowing for losses and holding periods, from:

1. selling or exchanging capital assets or assets treated as such, excluding state or municipal bonds;

2. transactions or events taxed as a sale or exchange of a capital asset for which the net amount is included in the taxpayer's federal AGI, excluding gains or losses from (a) holding or trading dealer equity options and (b) nonresident taxpayers, other than from the sale or exchange of real property in Connecticut; and

3. selling or exchanging certain business property, excluding sales included in the categories above.

Delay in Scheduled Income Tax Reductions for Single Filers (§§ 2-4)

The bill delays scheduled income tax reductions for single filers for three years. It does so by delaying increases in (1) AGI exempt from the tax and (2) income thresholds for phasing out (a) personal exemptions and credits and (b) maximum property tax credits.

Personal Exemption (§ 2). Under current law, the maximum personal exemption for single filers is scheduled to increase from $14,500 to $15,000 on January 1, 2015. The bill instead maintains the $14,500 exemption for three more years through the 2017 tax year.

By law, the personal exemption amounts gradually phase out at higher income levels until they are completely eliminated. The bill delays the scheduled increase in the personal exemption reduction threshold, from $29,000 to $30,000, to correspond to the three year delay. (The income tax personal exemption is reduced by $1,000 for each $1,000 of AGI over the specified threshold.)

Personal Credit (§ 3). The bill 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 thresholds do not qualify for a credit. Table 3 shows the qualifying personal credit income ranges for single filers under current law and the bill.

Table 3: Personal Credits for Single Filers

Tax Years

Qualifies for the Personal Credit (AGI)

Current Law

The Bill

Over

But Not Over

2014

Through 2017

$14,500

$62,500

2015 and after

2018 and after

15,000

64,500

Property Tax Credit (§ 4). The bill delays by three years a scheduled increase in the AGI threshold above which single filers receive reduced property tax credits. By law, the maximum property tax credit is $300. Certain taxpayers qualify for a reduced credit or no credit depending on their AGI and filing status, with the maximum credit reduced by 15% for each $10,000 of AGI over the specified threshold. Under current law, the AGI threshold at which a single filer's maximum property tax credit is reduced increases in 2015 from $62,500 to $64,500. The bill delays this scheduled increase to 2018.

EITC (§ 5)

The bill delays by two years the scheduled increase in the EITC. Under current law, the EITC is scheduled to increase to 30% for the 2015 tax year. The bill instead maintains it at 27.5% for two more years, through the 2016 tax year.

Military Retirement Income (§ 6)

The bill fully exempts federally taxable military retirement pay from the state income tax. Current law exempts 50% of this retirement pay.

The exemption applies to federal retirement pay for retired members of the U.S. Army, Navy, Air Force, Marine Corps, Coast Guard, and Army and Air National Guard.

EFFECTIVE DATE: Upon passage and applicable to tax years beginning on or after January 1, 2015, except for the military retirement income provision, which is effective July 1, 2015 and applicable to the same tax years.

§§ 7-8 & 22-23 — CORPORATION INCOME TAX

Surcharge (§§ 7-8)

The bill (1) extends the 20% corporation income tax surcharge for two additional years to the 2016 and 2017 income years and (2) imposes a temporary 10% surcharge for the 2018 income year.

As under current law, the surcharge generally applies to companies that have more than $250 in corporation tax liability. Companies that have less than $100 million in annual gross income in those years are exempt from the surcharge, unless they file combined or unitary returns.

Net Operating Loss (NOL) (§ 22)

The law allows corporations to deduct NOLs (the excess of allowable deductions over gross income for a taxable year), thereby reducing their tax liability. Corporations may carry forward NOLs for 20 years. Beginning with the 2015 income year, the bill limits the amount of NOL a corporation may carry forward to the lesser of (1) 50% of net income, or for companies with taxable income in other states, 50% of the net income apportioned to Connecticut, and (2) the excess of NOL over the NOL being carried forward from prior income years.

Tax Credit Limit (§ 23)

Current law allows corporations to use tax credits to reduce their corporation tax liability by up to 70% in any income year. The bill reduces the tax credit limit to 50.01% beginning with the 2015 income year.

EFFECTIVE DATE: Upon passage; tax surcharge provisions are applicable to income years starting on or after January 1, 2016.

§ 9 — INSURANCE PREMIUM TAX CREDIT LIMIT

The bill extends, to 2015 and 2016, the temporary cap on the maximum insurance premium tax liability that an insurer may offset through tax credits.

The caps are part of a structure that, by law, (1) classifies insurance premium tax credits into three types, (2) specifies the order in which an insurer must apply the three credit types to offset liability, and (3) establishes the maximum liability that an insurer can offset by claiming one or more of these types of credits.

By law, (1) type one credits are film and digital media production, entertainment infrastructure, and digital animation tax credits; (2) type two credits are insurance reinvestment credits; and (3) type three credits are all other tax credits. Table 4 shows the order and reduction schedule under current law and the bill.

Table 4: Order and Reduction Schedule for Claiming Insurance Premium Tax Credits under Current Law and the Bill

Credit Types Claimed

Order of Applying Credits

Maximum Reduction in Tax Liability

Type 3

Not applicable

30%

Types 1& 3

1. Type 3

2. Type 1

Type 3 = 30%

Sum of two types = 55%

Types 2 & 3

1. Type 3

2. Type 2

Type 3 = 30%

Sum of two types = 70%

Types 1, 2, & 3

1. Type 3

2. Type 1

3. Type 2

Type 3 = 30%

Type 1 & 3 = 55%

Sum of all types = 70%

Type 1 & 2

1. Type 1

2. Type 2

Type 1 = 55%

Sum of two types = 70%

EFFECTIVE DATE: Upon passage and applicable to calendar years starting on or after January 1, 2015.

§ 10 — FILM AND DIGITAL MEDIA PRODUCTION TAX CREDIT MORATORIUM

The bill extends, to FY 16 and FY 17, the temporary moratorium on issuing film and digital media production tax credits for certain motion pictures. Under current law, the moratorium expires at the end of FY 15.

As under current law, the moratorium (1) bars the issuance of tax credit vouchers for motion pictures that were not designated as state-certified productions before July 1, 2013 and (2) excludes motion pictures that conduct at least 25% of their principal photography days in a Connecticut facility that (a) receives at least $25 million in private investment and (b) opens for business on or after July 1, 2013. Other types of qualified productions continue to be eligible for tax credits during FY 16 and FY 17, including documentaries; long-form, specials, mini-series, series, music videos, or interstitial television programming; relocated television productions; interactive television or games; videogames; commercials or infomercials; and any digital media format created primarily for public viewing or distribution.

EFFECTIVE DATE: Upon passage

§§ 11-21 & 111 — SALES AND USE TAX

Rate (§§ 11-17)

Beginning October 1, 2015, the bill splits the 6.35% sales and use tax rate into a 5.85% “state revenue tax” and 0.5% “municipal revenue tax.” As under existing law, the total 6.35% tax is levied and administered by the state.

Beginning July 1, 2016, the bill lowers the state revenue tax rate from 5.85% to 5.35% and maintains the municipal revenue tax rate at 0.5%, resulting in a total combined rate of 5.85%.

To conform to these new rates, the bill makes technical changes to the flat sales tax on items sold for less than $3.

By law, a person who owes use tax to the state, but who pays sales or use tax to another state at a rate less than the Connecticut rate, must pay the difference to Connecticut. The bill does not specify how to apportion this difference among the state and municipal rates.

EFFECTIVE DATE: Upon passage, provided that the (1) October 1, 2015 rate split is applicable to sales occurring on or after October 1, 2015 and to sales of services billed to customers for a period that includes October 1, 2015; (2) July 1, 2016 rate decrease is applicable to sales occurring on or after July 1, 2016 and to sales of services billed to customers for a period that includes July 1, 2016; and (3) conforming changes to the flat sales tax rate are applicable to sales occurring on or after (a) October 1, 2015 for the October 1, 2015 rate split and (b) July 1, 2016 for the July 1, 2016 rate decrease.

Municipal Revenue Sharing Account (MRSA) (§ 11)

For calendar quarters ending on or after December 31, 2015, the bill requires the Department of Revenue Services (DRS) commissioner to deposit the revenue attributed to the 0.5% municipal revenue tax into MRSA. (sSB 1, reported favorably by the Finance, Revenue and Bonding Committee, apportions the revenue deposited in MRSA to municipalities and the state's nine regional councils of government (see BACKGROUND).)

EFFECTIVE DATE: Upon passage and applicable to sales occurring on or after October 1, 2015 and sales of services billed to customers for a period that includes October 1, 2015.

Computer and Data Processing Services (§§ 18-20)

The bill increases, from 1% to 6.35%, the sales and use tax rate on computer and data processing services. It also expands the types of computer and data processing services subject to the tax to include the creation, development, hosting, and maintenance of a web site.

EFFECTIVE DATE: October 1, 2015 and applicable to sales occurring on or after October 1, 2015 and sales of services billed to customers for a period that includes October 1, 2015.

Clothing and Footwear Exemptions (§§ 21 & 111)

The bill eliminates the sales and use tax exemption for clothing and footwear costing less than $50, currently scheduled to take effect on July 1, 2015. It also limits the exemption for clothing and footwear during the “sales-tax-free-week” to items costing less than $100, rather than $300.

New Taxable Services (§ 18)

The bill extends the sales and use tax to additional professional services, as shown in Table 5.

Table 5: Service Extensions

New Services Taxed

Certified public accountants and other accounting services

Architectural services

Engineering services

Drafting services

Building inspection services

Geophysical surveying and mapping services

Surveying and mapping services, except geophysical services

Interior design services

Industrial design services and other specialized design services

Administrative management and general management consulting services

Human resources consulting services

Marketing consulting services

Process, physical distribution, and logistics consulting services

Other management consulting services (certain management consulting services are taxable under existing law)

Other scientific and technical consulting services (The law, unchanged by the bill, specifies that environmental consulting is not taxable.)

Direct mail advertising (The law, unchanged by the bill, specifies that cooperative direct mail advertising is not taxable.)

Advertising material distribution services

Marketing research and public opinion polling

Translation and interpretation services

Veterinary services

All Other professional, scientific, and technical services having a North American Industrial Classification System code of 541990

Other gambling industries

Golf courses and country clubs

Dry cleaning and laundry services, except coin-operated services

EFFECTIVE DATE: October 1, 2015, and applicable to sales on or after that date and sales of services that are billed to customers for a period that includes October 1, 2015.

§§ 24 & 109 — HOSPITAL TAX

Credit Limit (§ 24)

For calendar quarters beginning on or after July 1, 2015, the bill imposes a 50.01% limit on the amount of hospital tax liability that hospitals may reduce by using tax credits.

EFFECTIVE DATE: Upon passage

FY 17 Refund (§ 109)

The bill requires the social services commissioner to refund to hospitals a pro rata share of $56 million in FY 17 hospital tax revenue. Each hospital's refund must be proportionate to the amount of hospital tax it paid in FY 17.

EFFECTIVE DATE: July 1, 2016

§ 25 — BUSINESS ENTITY TAX

Starting with the 2015 tax year, the bill reduces the business entity tax from $250 to $125. As under current law, the tax is due the 15th day of the fourth month after the close of the applicable tax year.

By law, businesses pay the tax every other year. It applies to foreign and domestic limited liability corporations (LLC), limited liability partnerships (LLP), limited partnerships (LP), and S corporations that are required to register with the secretary of the state.

EFFECTIVE DATE: Upon passage

§§ 26-28 — BUSINESS FILING FEES

The bill increases, from $20 to $100, the fee that foreign and domestic LPs, LLCs, and LLPs pay for filing an annual report with the secretary of the state.

EFFECTIVE DATE: October 1, 2015

§ 29 — TOBACCO SETTLEMENT FUND DISBURSEMENTS

For FY 16 and FY 17, the bill eliminates the $12 million disbursement from the Tobacco Settlement Fund to the Tobacco and Health Trust Fund. Beginning in FY 18, it reduces the disbursement to $6 million per year, thus making permanent the temporary reduction to the disbursement made for FY 14 and FY 15.

The bill also reduces, from $10 million to $5 million, the FY 16 disbursement from the Tobacco Settlement Fund to the Smart Start competitive grant account.

§ 30 — TRANSFERS FROM THE GENERAL FUND TO THE SPECIAL TRANSPORTATION FUND (STF)

Beginning in FY 17, the bill adjusts the amounts annually transferred from the General Fund to the STF, as shown in Table 6.

Table 6: Annual Transfers from the General Fund To STF (Millions)

Fiscal Year

Current Law

Bill

Difference

2017

$162.8

$137.8

($25)

2018

162.8

274.8

112

2019

162.8

417.8

255

2020 and thereafter

162.8

562.8

400

§ 31 — COMMUNITY INVESTMENT ACCOUNT (CIA)

From January 1, 2016 to June 30, 2017, the bill diverts to the General Fund, on a quarterly basis, 50% of the funds deposited in the CIA.

By law, the CIA contains land use document recording fees town clerks remit to the state treasurer. Money from the account is distributed quarterly to the agriculture sustainability account for milk producer grants and to the departments of (1) Economic and Community Development, for certain historic preservation purposes; (2) Housing, for affordable housing programs; (3) Energy and Environmental Protection, for municipal open space grants; and (4) Agriculture, for various agricultural and farmland preservation purposes.

§§ 32-33 — TRANSFERS TO THE GENERAL FUND

The bill transfers to the General Fund (1) $2.5 million from the private occupational school student protection account in FY 16, on or before October 1, 2015, and (2) $3 million from the municipal video competition trust account each fiscal year beginning in FY 16.

EFFECTIVE DATE: Upon passage, except the municipal video competition trust account transfer is effective July 1, 2015.

§§ 34-37 & 110 — PALLIATIVE MARIJUANA FEES

Under current law, all fees the Department of Consumer Protection (DCP) collects under its regulation of palliative marijuana are credited to the palliative marijuana administration account. The bill eliminates the account and requires the fees to be credited to the General Fund.

§§ 38-40 — BEER GROWLERS

The bill allows restaurant, café, and tavern alcohol permittees to sell at retail permittee-provided sealed containers of draught beer for off-premises consumption.

These retail sales are limited to (1) four liters of beer per day to any individual and (2) the authorized hours for off-premises alcohol consumption sales. By law, off-premises sale and dispensing of alcohol are allowed only on Monday to Saturday from 8:00 a.m. to 9:00 p.m. and Sundays from 10:00 a.m. to 5:00 p.m.  Permittees cannot sell or dispense alcohol for off-premises consumption on Thanksgiving Day, New Year's Day, or Christmas Day.

EFFECTIVE DATE: Upon passage

§§ 41-44 — KENO

The bill allows the Connecticut Lottery Corporation (CLC) to offer Keno games, generally subject to the same requirements as other state lottery games, including those concerning lottery sales agents, advertisements, and prizes. In Keno, players win prizes by correctly guessing some of the numbers generated by a central computer system using a random number generator, wheel system, or other drawing device. Under the bill, Keno is not operated on a video facsimile machine.

Under the bill, the CLC may not operate Keno until the state, through the Office of Policy and Management (OPM), enters agreements with the Mashantucket Pequot and Mohegan tribes regarding CLC's operation of Keno. The bill also gives CLC the exclusive right to operate and manage the sale of all lottery games in Connecticut, except on the Mashantucket Pequot and Mohegan reservations.

§ 45 — RENTAL SURCHARGE

Under current law, the state imposes a surcharge on short-term car, truck, and machinery rentals (i.e., 30 days or less). The surcharge is (1) 3% for car and truck rentals and (2) 1.5% for machinery rentals.

The bill limits the rental companies subject to the surcharge to people or businesses generating at least 51% of their total annual revenue from rentals, excluding retail or wholesale rental equipment sales. As under current law, the surcharge applies to companies that (1) are in the business of renting cars, trucks, or machinery and (2) have a fleet of at least five cars, trucks, or pieces of machinery in Connecticut.

Under current law, the 1.5% surcharge applies to rentals for 30 days or less of heavy construction, mining, and forestry equipment without an operator. The bill expands it to cover (1) all equipment a rental company owns and (2) rentals of 364 days or less. It eliminates a provision specifying that the rental period for the equipment runs from the date the machinery is rented to the date it is returned to the rental company.

By law, the surcharge reimburses the rental company for Connecticut property taxes and Department of Motor Vehicles (DMV) licensing and titling fees paid on the equipment. The company must annually report to DRS on (1) the aggregate amounts of personal property taxes paid to towns and registration and titling fees paid to DMV, and (2) the aggregate amount of rental surcharges collected in the previous year on the rental machinery, along with any other information DRS requires. The bill requires the amounts and information to be submitted in a consolidated report.

§§ 46-49 — SALE AND MANUFACTURING OF ELECTRONIC CIGARETTES

Electronic Nicotine Delivery Systems and Vapor Products (§ 46)

By law, an “electronic nicotine delivery system” is an electronic device used to simulate smoking while delivering nicotine or another substance to a person who inhales from it. Under current law, delivery systems include electronic (1) cigarettes; (2) cigars; (3) cigarillos; (4) pipes; (5) hookahs; and (6) related devices, cartridges, or other components. The bill expands this list to include electronic cigarette liquid used in such a delivery system or vapor product.

Under existing law, a “vapor product” uses a heating element; power source; electronic circuit; or other electronic, chemical, or mechanical means, regardless of shape or size, to produce a vapor the user inhales. The vapor may or may not include nicotine.

Existing law bans (1) people from selling, giving, or delivering such systems or products to minors and (2) minors from buying or possessing them in public.

Dealer and Manufacturer Registration (§§ 47-48)

Beginning March 1, 2016, the bill requires electronic nicotine delivery system dealers and manufacturers to register with DCP and annually renew their registration in order to sell or manufacture an electronic nicotine delivery system or vapor product. Under the bill, a manufacturer is anyone who mixes, compounds, repackages, or resizes any nicotine-containing electronic nicotine delivery system or vapor product.

Application. Beginning January 1, 2016, anyone seeking a dealer or manufacturer registration or registration renewal must apply to DCP, using a DCP-prescribed form. The application must include (1) the applicant's name and address; (2) the business' location; (3) a financial statement detailing any business transactions connected to the application; (4) the applicant's criminal convictions; and (5) proof that the business location will meet state and local building, fire, and zoning requirements. The bill authorizes DCP to conduct an investigation to determine whether to issue an applicant's registration.

The DCP commissioner must issue the registration within 30 days after the application date, unless he finds that the applicant (1) willfully made a materially false statement in the registration application or any other DCP-application, (2) owes state taxes, (3) was convicted of violating any state or federal cigarette or tobacco products tax laws, or (4) is not suitable because of his or her criminal record. The bill prohibits the commissioner from denying a registration due to a prior conviction of a crime except as permitted by law.

Fees. The bill requires applicants to pay a nonrefundable application fee of $75, in addition to the $400 annual fee for registered dealers and manufacturers. There is no application fee to renew a registration.

Dealer Posting Requirement. The bill requires dealers to post their registrations in a prominent location next to the electronic nicotine delivery system products or vapor products they sell.

Transferability and Attachment. A registration is not transferable under the bill, except for when a registered dealer or manufacturer dies, in which case the registration transfers to his or her estate.

The bill provides that a dealer or manufacturer registration is not property or subject to attachment and execution.

Partnerships. Under the bill, if the registration is issued to a partnership and the partnership adds one or more new partners, it must submit a new application and pay new application and annual fees. If one or more of the partners dies or retires, the remaining partners do not need to file a new application or pay an additional fee for the registration's unexpired portion. But they must notify DCP of the change, and DCP must endorse the registration to reflect the correct ownership.

Late Renewals. DCP may renew an expired registration if the applicant pays both the annual fee and the standard late renewal penalty the commissioner may impose. By law, the penalty must equal 10% of the renewal fee and must be at least $10 and no more than $100.

Dealers and manufacturers subject to administrative or court proceedings are not eligible for a late renewal.

Fines and Penalties for Violations. The bill makes it illegal to manufacture, sell, offer for sale, or possess with intent to sell an electronic nicotine delivery system or vapor product without a manufacturer or dealer registration. The penalty for each knowing violation is a fine of up to $50 per day. The commissioner may waive all or part of the fine if he is satisfied that the failure to obtain or renew the registration was due to reasonable cause.

Under the bill, the penalty is an infraction with a $90 fine for a manufacturer or dealer who operates for no more than 90 days after his or her license expires.

Prior to imposing a penalty, the bill requires the DCP commissioner to notify the dealer or manufacturer of the violation and give 60 days to comply. He must send the notice, within available appropriations, with a certificate of mailing or a similar U.S. Postal Service form that verifies the date on which it was sent. (A certificate of mailing is a receipt that provides evidence of the date that mail was presented to the U.S. Postal Service for mailing.)

Suspending or Revoking a Registration. DCP may, at its discretion, suspend or revoke a registration. Anyone aggrieved by a denial, suspension, or revocation may appeal by following the appeal process for liquor sale permits.

Public Hearing (§ 49)

The bill requires the Public Health Committee to hold a public hearing on any proposed federal rule changes deeming tobacco products subject to the Food, Drug, and Cosmetic Act. The committee must hold the hearing within 30 days after a rule becomes final and determine if Connecticut law needs to be changed to conform to this rule.

EFFECTIVE DATE: January 1, 2016, except the provision requiring the public hearing takes effect upon passage.

§§ 50-75 — DPH LICENSE RENEWAL FEES

The bill (1) increases by $5 license renewal fees for various DPH-licensed professionals, as shown in Table 7, and (2) directs the revenue generated to fund the professional assistance program for DPH-regulated professionals (currently, the Health Assistance InterVention Education Network (HAVEN)). By law, the program is an alternative, voluntary, and confidential rehabilitation program that provides support services to health professionals with a chemical dependency, emotional or behavioral disorder, or physical or mental illness.

The DPH commissioner must certify the amount of revenue received as a result of the fee increase each January, April, July, and October and transfer it to the professional assistance program account, which the bill establishes. She must use the funds to provide grants to program providers and medical review committees under the assistance program.

Table 7: DPH License Renewals Subject To Fee Increase

 §

License Renewal

Current Fee

Proposed Fee

50

Dentist

570

575

50

Optometrist

375

380

50

Midwife

15

20

50

Dental hygienist

100

105

50

Physician

570

575

50

Surgeon

570

575

50

Podiatrist

565

570

50

Chiropractic

565

570

50

Naturopathic

565

570

50

Registered Nurse

105

110

50

Advanced Practice Registered Nurse

125

130

50

Licensed Practical Nurse

65

70

50

Nurse Midwife

125

130

50

Physical Therapist

100

105

50

Physical Therapist Assistant

60

65

50

Physician Assistant

150

155

50, 58

Perfusionist

315

320

51

Nursing home administrator

200

205

52

Athletic trainer

200

205

53

Radiographer

100

105

54

Occupational therapist

200

205

54

Occupational therapy assistant

200

205

55

Alcohol and drug counselor

190

195

55

Certified alcohol and drug counselor

190

195

56

Licensed optician

200

205

57

Respiratory care practitioner

100

105

59

Psychologist

565

570

60

Marital and family therapist

315

320

61

Clinical social worker

190

195

61

Master social worker

190

195

62

Professional counselor

190

195

63

Veterinarian

565

570

64

Massage therapist

250

255

66

Dietician-nutritionist

100

105

67

Acupuncturist

250

255

68

Paramedic

150

155

69

Embalmer

110

115

69

Funeral director

230

235

69

Funeral services business inspection certificate

190

195

70

Electrologist

200

205

71

Audiologist

200

205

72

Hearing instrument specialist

250

255

73

Speech and language pathologist

200

205

§§ 76-101 — COMBINED REPORTING

The bill requires any company that is (1) a member of a corporate group of related companies meeting certain criteria and (2) subject to the Connecticut corporation tax (a “taxable member”) to determine its Connecticut corporation tax liability based on the net income or capital base of the entire group. Under the bill, a company must use this method of computing tax liability if it is part of a corporate group engaged in a “unitary business,” as defined in the bill. Under current law, a company doing business in Connecticut that is part of a larger group determines its Connecticut net income separately but may file a combined return under certain circumstances.

Unitary Business and Combined Group (§ 76)

The bill defines a “unitary business” as a single economic enterprise that is interdependent, integrated, or interrelated enough through its activities to provide mutual benefit and produce significant sharing or exchanges of value among its entities or a significant flow of value among its separate parts. A unitary business can be either separate parts of a single entity or a group of separate entities under common ownership. Businesses conducted or connected through partnerships or S corporations (“pass-through entities”) may be considered unitary if they meet certain conditions.

Under the bill, businesses are considered to be under common ownership if the same entity or entities directly or indirectly own more than 50% of voting control of each of them. The owners do not themselves have to be members of the combined group. Indirect control must be determined according to the federal tax law.

A “combined group” is all the companies that (1) have common ownership, (2) are engaged in a unitary business, and (3) have at least one member that is subject to the Connecticut corporation tax.

Group Filing Requirements (§ 78)

For purposes of a unitary tax filing, the bill gives a combined group the option of determining its members' net income, capital base, and apportionment factors on a (1) world wide basis (i.e., including foreign affiliates) or (2) “affiliated group” basis (see below). The group's designated taxable member must make a world wide or affiliated group election for unitary filing on an original, timely filed tax return for an income year. The election is binding for the income year in which it is made and the following 10 years.

If the group does not elect a world wide basis or affiliated group basis, it must determine the net income, capital base, and apportionment factors of each of its taxable members on a “water's-edge basis.” Under the bill, a water's-edge basis means that a group must include the net income, capital base, and apportionment factors of nontaxable members only if they:

1. are incorporated in, or formed under the laws of, the United States, any state, the District of Columbia, or a U. S. territory or possession or

2. directly or indirectly earn more than 20% of their gross income from intangible property or service-related activities whose costs are generally deductible from federal taxes against the income of other group members, either currently or over a period of time. (These nontaxable members must be included only to the extent of this income and its related apportionment factors.)

Affiliated Group Election. Under the bill, an “affiliated group” is generally any group treated as an affiliated group for federal tax purposes (as described below), except that it also includes domestic corporations that are commonly owned, directly or indirectly, by any member of the group, regardless of whether the group includes corporations (1) included in more than one federal consolidated return, (2) engaged in one or more unitary business, or (3) not engaged in a unitary business with any other affiliated group member. A group making an affiliated group election must include the net income or loss and apportionment factors of all of its members that are subject to tax or would be if they were conducting business in the state, regardless of whether they are engaged in a unitary business.

Under federal tax law, an “affiliated group” is a group of corporations or corporate chains connected to the same parent corporation in which (1) one or more of the corporations included in the group directly owns at least 80% of the voting power and 80% of the total value of the common stock of each of the other included corporations and (2) their common parent directly owns at least 80% of the voting power and 80% of the total value of the common stock of at least one of the included corporations (IRC § 1504).

Net Income and Capital Base (§ 77)

Net Income or Loss. When determining the total income or loss subject to apportionment for Connecticut corporation tax purposes, the bill requires the combined group to include and aggregate the following.

1. For each group member incorporated in the United States and included in a consolidated federal corporate return, its gross income minus Connecticut corporation tax deductions as if it were not consolidated for federal tax purposes.

2. For each group member not included in a consolidated federal return but required to file its own return, its gross income minus Connecticut corporation tax deductions.

3. For each member incorporated outside the United States, not included in a federal consolidated return and not required to file its own federal return, the income determined from regularly maintained profit and loss statements for each foreign office or branch adjusted on any reasonable basis to conform to U.S. accounting standards and expressed in U.S. dollars. Reasonable alternative procedures may be applied if the DRS commissioner determines that the reported income reasonably approximates the income determined under the Connecticut corporation tax law.

4. If the unitary business has income from a pass-through entity, the members' direct and indirect share of that entity's unitary business income.

Under current combined filings, most income and deductions from inter-company transactions within a combined group must be eliminated. The bill establishes requirements for treating the following income and deductions in a unitary filing.

1. Dividends paid by one group member to another must be eliminated.

2. Business income from an intercompany transaction with another group member must be deferred as required under federal tax rules unless the object of the transaction is sold or otherwise removed from the unitary business or the buyer and seller cease to be members of the same combined group.

3. Charitable expenses incurred by a group member may be deducted from the combined group's net income, subject to federal income limits applicable to the entire group's business income. If the part of the deduction is carried over to a later year, it must be treated in that year as incurred by the same group member.

4. Capital gains and losses must be combined for all members without netting among classes of gains and losses, apportioned to Connecticut, and applied to the income or loss of the Connecticut taxable members. If the deduction for a loss is limited and a loss carryover is required, the loss must be treated in a later year as being incurred by the same member.

5. Expenses directly or indirectly attributable to federally tax-exempt income must be disallowed in determining the combined group's net income.

Income Apportionment Factors. By law, multistate companies subject to the Connecticut corporation tax must apportion their net income or loss and alternate capital base using statutory apportionment formulas. Most companies must use a formula that combines the ratios of their property, payroll, and sales (receipts) in Connecticut to all their property, payroll, and sales. However, some types of businesses, including manufacturers, broadcasters, and financial institutions, are allowed to use a single factor apportionment formula based entirely on the ratio of their sales in Connecticut to all their sales.

In apportioning its income or loss for the Connecticut corporation tax, the bill requires each taxable member of a combined group to use the otherwise applicable Connecticut statutory apportionment percentage. It specifies how taxable members of the combined group must incorporate the property, payroll, and sales of nontaxable group members into the apportionment factors they use to apportion the group's income for purposes of the taxable members' Connecticut corporation tax liability.

Under the bill, though each taxable member's apportionment is based on the Connecticut apportionment formula that applies to that member, the taxable member must add in a share of the nontaxable members' sales, property, and payroll factors as follows.

1. Each taxable member must add to its sales factor numerator a share of the aggregate sales of the groups' nontaxable members. This share is the ratio of the taxable member's Connecticut sales to the Connecticut sales of all the group's taxable members.

2. The property and payroll factor denominators are the aggregate property and payrolls for the entire group, including taxable and nontaxable members, even if some group members are subject to single-factor apportionment (i.e., based on sales only).

3. Transactions between or among group members must be eliminated in determining the apportionment factors.

Once the applicable apportionment factors for each taxable member have been determined, they must be applied to the combined group's taxable income to determine each taxable member's net income or loss apportioned to Connecticut.

Net Operating Loss. Once it calculates its share of net income or loss apportioned to Connecticut, the bill allows each taxable group member to deduct its share of the group's net operating loss (NOL) from that income. It allows the following NOL carryovers.

1. For income years starting on or after January 1, 2015, if the combined group's net income computation results in a net operating loss, the taxable members can carry forward the share apportioned to Connecticut consistent with NOL carryover limits (see § 22). If the taxable member has more than one NOL carryover, it must apply them in the order they were incurred, deducting the older one first. The bill allows a taxable member who has an NOL carryover derived from the combined group in an income year beginning on or after January 1, 2015, to share it with other taxable group members if they were part of the group when the loss was incurred. Any such sharing reduces the taxable member's original NOL carryover.

2. A taxable member can deduct an NOL carryover derived from either pre-January 1, 2015 losses or losses incurred before the taxable member joined the combined group and can share it with other members that were part of the same combined group in the year the loss was incurred.

Net Income Tax Calculation. As under current law, each taxable member must calculate its net income tax liability by multiplying its Connecticut apportioned net income or loss by the statutory corporation tax rate of 7.5%.

Capital Base Apportionment. By law, corporations must calculate their Connecticut corporation tax liability on the basis of both their net income and capital base and pay the higher of the two amounts.

The bill requires combined groups to determine their alternative capital bases by combining their separate bases, including those of the nontaxable members, as determined under current law, but excluding deductions for inter-corporate or private company stockholdings in the combined group. Group members that are financial services companies must calculate the value of their annual capital base as required by existing law.

A taxable member must apportion the combined group's capital base according to the ratio of the taxable member's individual capital base to that of the combined capital bases of all taxable members of the group. As with the income apportionment, a share of the nontaxable members' capital bases must be included according to the ratio of the taxable member's Connecticut capital base to the combined Connecticut capital bases of all the group's taxable members.

As under existing law, the maximum aggregate tax calculated under the capital base method is $1 million.

Minimum Tax. Under the bill, as under existing law, taxable members must pay a minimum tax of $ 250 regardless of tax credits. In addition, no taxable member may use tax credits to reduce its tax liability by more than the applicable tax credit limit.

Tax Credits. The bill requires each taxable member to separately apply its tax credits, subject to the tax credit limit, but allows it to share tax credits and credit carryover with other taxable members under certain conditions.

The bill allows a taxable member to share tax credits it earns beginning on or after the 2015 income year with other taxable members in the group. Any credit amount used by another taxable member reduces the amount of credit carryover available to the taxable member that originally earned it. If the taxable member has a credit carryover derived from an income year beginning on or after 2015, it may share the carryover credit with the group's taxable members as long they were taxable members in the income year in which the credit was earned.

A taxable member with a credit carryover derived from an income year prior to 2015 or during which it was not a member of the combined group may (1) continue to use the carryover and (2) share it with other group members that were part of its combined group under current law.

Deduction for Certain Publicly-Traded Companies (§ 79)

The bill allows certain unitary groups to offset any increase in their members' “net deferred tax liability” or decrease in their “net deferred tax assets” resulting from the newly imposed unitary reporting requirements. It does so by allowing them to deduct the increase or decrease from their net income over seven years, beginning in the 2018 income year.

Under the bill, a member's “net deferred tax liability” is the amount by which its deferred tax liabilities exceed the group's deferred tax assets, while its “net deferred tax assets” are its deferred tax assets that exceed the group's deferred tax liabilities. Both must be determined according to generally accepted accounting principles (GAAP).

The deduction applies only to unitary groups that are publicly-traded companies, including companies whose results are reported in a publicly-traded company's financial statements, prepared according to GAAP. From the 2018 to 2024 income years, such groups may deduct from their net income an amount equal to one-seventh of the amount necessary to offset the increase in net deferred tax liability or decrease in net deferred tax asset or the aggregate of both, resulting from unitary reporting. They may carry forward any excess deduction to future income years until it is fully utilized.

The groups must calculate the deduction regardless of its impact on federal taxes and without altering the tax basis of any asset. Any events that occur after the deduction is calculated, including the disposition or abandonment of assets, must not reduce it.

Annual Return (§ 94)

The bill requires a combined group to designate one of its Connecticut taxable members to file the unitary return and pay the tax on behalf of all its taxable members. To this end, the designated member may, on the taxable and nontaxable members' behalf, (1) sign a unitary return, (2) apply for filing extensions, (3) agree to an examination or assessment of the return, (4) make offers of compromise and closing agreements regarding tax liability, and (5) receive refunds and credits for tax overpayments.

A combined group member whose income year is different from that of the rest of the group must report amounts from its return for its income year that ends during the “group income year.” Under the bill, the “group income year is (1) the designated taxable member's income year or (2) if two or more members in the group file in the same federal consolidated tax return, the income year used on the federal return. No such reporting is required until the beginning of the member's first income year starting on or after January 1, 2015.

The bill allows the designated taxable member to recover the payments from the other taxable members and prohibits those members from holding the designated taxable member liable for the payments. However, each taxable member of the combined group is jointly and severally liable for the taxes plus any interest, penalties, or additions due from any other taxable member.

A combined group required to name a designated member must give the DRS commissioner written notice of the selection by the date the tax is due. The commissioner must approve any change in the designated member.

The bill gives the commissioner the sole discretion to (1) send notices, make deficiency assessments, and provide tax refunds and credits to the designated member or any other group member and (2) require a unitary return to be filed electronically and any tax payment to be made by electronic funds transfer.

Estimated Tax (§ 100)

The bill applies estimated tax requirements to taxable members of combined groups required to file unitary returns. It makes the designated taxable member responsible for paying the estimated tax installments.

By law, corporations must pay the following percentages of their annual taxes by the following dates: 30% by March 15, 40% by June 15, 10% by October 15, and 20% by December 15. The bill extends the due dates for the first estimated tax payment for combined groups whose 2015 group income years start in January, February, or March 2015 to June 15, 2015; July 15, 2015; and August 15, 2015, respectively. Such groups must pay 70% (i.e., a combination of the first and second payment) of the required annual payment on those dates.

Under the bill, taxable members of combined groups required to file unitary returns are not subject to interest and penalties for underpaying estimated tax in 2015 if:

1. they pay estimated taxes equal to at least 90% of that shown on their unitary tax filing for the 2015 group income year or

2. if the 2014 income year was a 12-month year, the taxable members of the combined group pay estimated taxes of 100% of the tax liability, before credits, shown on either their individual separate 2014 returns or their optional 2014 combined return, as applicable.

Current Combined Reporting Provisions and Conforming Sections (§§ 80-93, 95-99, & 101)

Under current law, a corporate group doing business in Connecticut that files a consolidated federal corporate tax return has the option of filing a combined Connecticut return but first has to separately apportion each member's net income or capital base separately among the states where the member operates. The separately apportioned Connecticut shares of income and losses of group members doing business here are then combined to determine their corporation tax liability. The DRS commissioner can also require groups that do not file consolidated federal returns to file combined Connecticut reports under certain circumstances. The bill eliminates these combined return provisions for income years starting on or after January 1, 2015 (when the bill's unitary reporting requirements begin).

The bill makes additional statutory changes to conform to the mandatory unitary filing requirements and the elimination of current combined reporting provisions.

EFFECTIVE DATE: Upon passage and applicable to income years starting on or after January 1, 2015.

§ 102-107 — BUDGET RESERVE FUND

The bill establishes a mechanism for diverting projected surpluses in certain tax revenues to the Budget Reserve (i.e. “Rainy Day”) Fund (BRF). It establishes a (1) formula and process for calculating the revenue diversion and (2) Restricted Grants Fund (RGF) to hold the diverted funds until after the close of General Fund accounts each fiscal year, at which point they transfer to the BRF.

The bill applies to revenue (referred to as “combined revenue”) from the (1) corporation income tax and (2) personal income tax's estimated and final payments (i.e., income tax revenue generated from taxpayers who make estimated income tax payments on a quarterly basis).

Threshold Level for BRF Deposits

Beginning in FY 16, the bill requires the state comptroller to annually certify the threshold level for BRF deposits using a formula based on (1) a 10-year average of the state's combined revenue and (2) the rate of growth in combined revenue. Under the bill, a “10-year average” is the average amount of combined revenue in the 10 fiscal years preceding a given fiscal year.

Formula. The comptroller must determine the threshold using a three-step calculation. The first step is to calculate the 10-year average for the current fiscal year.

The second step is to calculate the rate of growth in combined revenue over the preceding 10 years. To do so, the comptroller must:

1. calculate the 10-year average for each fiscal year preceding the current fiscal year;

2. calculate, for each of these years, the difference between the actual combined revenue for the given fiscal year and the 10-year average for that same fiscal year, divided by the 10-year average for that fiscal year (“differential”); and

3. take the average of these 10 differentials and add one.

The last step is to multiply the two numbers derived from steps one and two. The threshold level for BRF deposits is the product of this multiplication.

Certifying and Reporting the Threshold Level. Beginning in FY 16, the bill requires the comptroller to include a statement certifying the threshold level for the current fiscal year in the annual report he submits to the governor on the state's financial condition. By law, he must submit this report by September 30 and make a published copy available to the public by December 31.

The bill requires the OPM secretary and OFA director to annually report the comptroller's certified threshold level by November 10, after adjusting for enacted laws projected to impact the estimated and final portion of the income tax or corporation income tax revenue by more than 1%. Presumably, the threshold is adjusted upward by the amount of a projected revenue increase and downward by the amount of a projected revenue decrease.

The OPM secretary and OFA director may (1) recalculate their threshold level adjustments to reflect any consensus revenue (see BACKGROUND) revisions in January and April impacting these revenue sources and (2) continue making the adjustments (a) for up to 10 fiscal years following the implementation of the law that created the revenue impact or (b) until there is no longer a revenue impact of more than 1%, whichever comes first. They must report any such revisions in their January and April consensus revenue estimates and include information on how (1) they determined the revenue impact and (2) used that information to adjust the threshold level.

The bill also requires the OPM secretary and OFA director to each report the estimated threshold level, using the bill's formula, for the three fiscal years following the current fiscal year.

Required Transfers from General Fund to RGF and BRF

Beginning in FY 17, the bill diverts, to the newly created RGF, projected surpluses in combined revenue based on January and April consensus revenue estimates. The bill requires the state treasurer to transfer the surpluses from the RGF to the BRF after the close of General Fund accounts each fiscal year. As with the BRF under existing law, the bill authorizes the treasurer to invest all or part of the RGF in certain statutorily prescribed investments and directs her to credit all investment interest to the General Fund.

January. The bill requires the state treasurer to transfer funds from the General Fund to the RGF if the January 15 consensus revenue estimate projects combined revenue for the current fiscal year that exceeds the threshold level. The treasurer must transfer the amount projected to exceed this level annually by January 31.

Under the bill, there is no transfer if (1) combined revenue is projected to be less than or equal to the threshold level or (2) the consensus revenue estimate for the current fiscal year projects a year-end General Fund deficit.

April. The bill requires the treasurer to adjust the amount diverted to the RGF in January based on the April 30 revised consensus estimate for combined revenue. It does so by requiring the state treasurer to transfer (1) additional funds from the General Fund to the RGF or (2) funds out of the RGF and back into the General Fund. In certain cases, it requires a transfer to the RGF after the April 30 estimate even if no transfer was made in January.

As Table 8 shows, the transfer depends on whether the (1) January estimate was more or less than the threshold level and (2) April estimate (a) increases or decreases the January estimate or (b) is more or less than the threshold level. The treasurer must transfer the required amounts to or from the RGF annually by May 15. As with the January estimate, there is no transfer if the April 30 estimate for the current fiscal year projects a year-end General Fund deficit.

Table 8: Transfers Required Following April 30 Consensus Revenue Estimate

January 15 Combined Revenue Projection

April 30 Combined Revenue Projection

Transfer Required Under the Bill

Exceeded the threshold level

Revised upward

Difference between January and April combined revenue projection must be transferred to RGF

Revised downward but still more than the threshold level for deposits

Difference between January and April combined revenue projection must be transferred from RGF to the General Fund

Revised downward to a level less than the threshold level for deposits

Difference between January combined revenue projection and the threshold level must be transferred from RGF to the General Fund

Less than or equal to the threshold level

Revised upward to a level exceeding the threshold level

Difference between April combined revenue projection and threshold level must be transferred to the RGF

Revised upward but remaining less than the threshold level

No transfer to RGF

Deficit Mitigation Plan. The bill authorizes the governor to direct the treasurer to transfer money in the RGF to the General Fund as part of a required deficit mitigation plan. By law, the governor must submit a deficit mitigation plan whenever the comptroller projects a current year deficit of more than 1% of General Fund appropriations.

Reducing or Eliminating Transfers to RGF or BRF. The bill requires at least three-fifths of the members of the Appropriations and Finance, Revenue and Bonding committees to approve any bill that, if passed, would reduce or eliminate the amount of any deposit to the BRF or RGF. It is unclear whether this provision is enforceable against future legislatures (see BACKGROUND).

BRF

Purpose. The bill expressly provides that the BRF is to be maintained and invested to reduce revenue volatility in the General Fund and reduce the need for tax increases and state aid cuts due to economic changes.

Maximum Balance. The bill increases the BRF's maximum balance from 10% to 15% of net General Fund appropriations for the current fiscal year but appears to allow the balance to exceed 15% under certain circumstances. Specifically, if a required transfer to the BRF would cause the balance to exceed 15%, the bill appears to allow such a transfer to be made in whole, thus causing the balance to exceed 15%. As under existing law, once the BRF reaches the maximum, the treasurer may not transfer additional funds to it. Any remaining funds must go towards (1) the State Employee Retirement Fund's unfunded liability and (2) paying off outstanding state debt.

Authorized Use of Funds in the BRF. Beginning in FY 17, the bill provides statutory authority for the legislature to transfer funds from the BRF to the General Fund in the three fiscal years following a fiscal year in which the April 30 consensus revenue estimate projects a 2% drop in General Fund tax revenue from the current fiscal year to the next fiscal year.

Directing BRF Transfers to Pay Unfunded Pension Liability. By law, any unappropriated surplus that remains after the BRF reaches its maximum balance must be used for paying the State Employee Retirement Fund's unfunded liability. Beginning in FY 17, the bill additionally earmarks for that purpose a percentage of any amount transferred to the BRF. The percentage depends on the BRF's balance, as shown in Table 9.

Table 9: BRF Transfer Directed to Unfunded Pension Liabilities

BRF's Balance as a % of Net General Fund Appropriations

Percentage of BRF Transfer Directed to State Employee Retirement Fund

Less than 5%

5%

5% ≤ balance < 10%

10%

10% ≤ balance < 15%

15%

Reports to the Legislature and Governor

Beginning by December 15, 2020, and every five years thereafter, the bill requires the OPM secretary, OFA director, and state comptroller to each report to the Finance, Revenue and Bonding Committee and the governor on the bill's BRF deposit formula and include any recommended changes to the formula or BRF cap that are consistent with the BRF's purpose, as described above.

The reports must analyze the:

1. formula's impact on General Fund tax revenue volatility,

2. adequacy of the formula's required deposits to replace potential future revenue declines resulting from economic downturns,

3. amount of additional payments toward unfunded liability made as a result of the formula, and

4. adequacy of the BRF's cap.

§ 108 — TAX INCREMENT FINANCING (TIF) FOR HARTFORD DEVELOPMENT

TIF Bonds for Hartford Downtown North Development Project

With the State Bond Commission's approval, the bill requires Connecticut Innovations, Inc. (CI) to help finance Hartford's Downtown North Development Project by issuing bonds backed by incremental sales tax revenue the project generates. This incremental revenue includes lodgings tax revenue but not the sales tax revenue generated by the project's proposed stadium. The bill does not describe the project's end use, specify its location, or indicate its cost but requires CI to determine the amount of bonds it will issue for the project based its economic and revenue impact.

CI-Hartford Agreement

CI must enter into an agreement with Hartford under which incremental sales tax revenue generated by the Downtown North Development Project may be used to repay the bonds CI issued to help finance the project. CI must determine the amount of bonds it will issue for the project based on its funding plan and impact on Hartford and the capital region. To help CI make this determination, Hartford must provide any information CI needs about the project, including:

1. the types of businesses proposed to be established in the project area;

2. the number of jobs that will be created or retained and their average wage rates;

3. feasibility studies, business plans, or other information needed to determine the project's financial viability;

4. the amount and types of bonds proposed for the project and how the proceeds will be used;

5. other sources for repaying the bonds, including incremental property tax revenue;

6. a description of the project area and the firms operating there;

7. an assessment of the project's local and regional economic impact and its projected incremental sales taxes;

8. an analysis of the infrastructure needed to support the project and any available funding sources; and

9. information that demonstrates the incremental sales tax revenue the project generates plus any funds Hartford provides are enough to repay the bonds.

The agreement (1) may require Hartford to reimburse CI for the cost of conducting the independent financial assessment described below and (2) must require Hartford to reimburse OPM for the annual independent financial analysis, which is also described below.

CI Review

CI must review the information Hartford provided about the project and obtain any other information it needs to determine the amount of bonds it will issue for the project, whether the bonds can be repaid with the incremental sales taxes the project will generate, and how the project will affect the city and the region.

CI must also retain financial advisors and other experts it deems necessary to assess independently Hartford's information, including incremental sales tax projections, assessments of the project's economic viability, and whether the project will generate enough incremental revenue to repay the bonds.

Lastly, CI must prepare a revenue impact assessment that estimates the:

1. project's projected incremental sales tax revenues;

2. other state and local tax revenue the project will generate;

3. foregone sales tax revenue resulting from the project; and

4. the economic benefits resulting from the project's construction, including its revenue impact.

CI's board of directors must consider all of the above information to determine the amount and type of bonds it will issue to support the project, how Hartford must use the bond proceeds, and the amount of incremental sales tax revenue CI allocated for repaying the bonds' principal and interest. That amount cannot exceed the projected incremental sales taxes, and the bill deems that amount appropriated from the General Fund.

Besides issuing bonds for the project, CI can use any of its other powers to assist the project, including providing other forms of financial assistance, which, together with the bond proceeds, may be combined with other federal, state, and private funds to support the project.

Bond Authorization

CI may issue one or more taxable or tax-exempt bonds as the law allows backed by incremental sales tax revenue and any funds Hartford contributes toward the project. It can also issue bonds to refund the initial ones. In conjunction with the state treasurer, CI, before issuing the bonds, must determine:

1. their interest rates;

2. maturity dates;

3. payment medium;

4. redemption terms and privileges;

5. whether CI will sell the bonds by negotiation or competitive sale; and

6. any other terms and conditions for issuing the bonds that are consistent with the bill, including pledging a special capital reserve to secure their repayment.

State Bond Commission Approval

CI cannot issue the bonds without the State Bond Commission's approval. It must notify the commission about the amount of bonds it proposes to issue for the project, and the commission may approve the issuance only if CI submits the proposal and the supporting information to the commission at least 10 days before it meets to consider the proposal. During that time, CI must also give the commission any other information it deems appropriate. The commission may consider the information from CI in deciding whether to approve the bonds, which require no subsequent approvals.

Bond Proceeds

CI may grant the bond proceeds to the city, which may use them to acquire, construct, or equip the project. It may also allow Hartford to use an unspecified portion of the proceeds to implement or administer redevelopment or development plans the law authorizes.

Repaying Bonds

While the bonds are outstanding, the treasurer must make principal and interest payments to the trustee when they are due, up to the amounts deemed appropriated for that year from the General Fund.

Hartford may contribute incremental property tax revenues toward repaying the bonds according to the method the statutes prescribe for using such revenues to repay municipal bonds issued to finance redevelopment or municipal development projects. That method allows municipalities to use the increase in property tax revenue generated by property that was improved under a redevelopment or municipal development plan to repay the municipal bonds issued to finance development activities the plans authorize (CGS §§ 8-134a and 8-192a).

Annual Report

By July 1 during each year that the bonds are outstanding, CI must report to Hartford's mayor and the OPM secretary about the project's operations, finances, and progress toward meeting the project's economic development objectives. In doing so, CI must review and evaluate the project's progress, devising and using forecasting techniques and relevant performance indices. The review must:

1. compare actual and estimated expenditures;

2. identify significant cost overruns;

3. track the number of jobs the project created or expects to create;

4. determine the actual or estimated job creation costs for CI;

5. calculate the private dollars invested in the project, the private investment it stimulated, and how those direct and indirect investments compare to the public investment;

6. determine the number of new businesses and jobs that were created; and

7. assess how the project affected tourism.

Annual Independent Revenue Analysis

By July 1 during each year that the bonds are outstanding, OPM must hire independent financial analysts to assess the project's financial status, including whether the:

1. actual incremental sales tax revenue meets the projected revenue,

2. project is economically viable, and

3. incremental sales tax and other revenue sources are generating enough revenue to repay the bonds.

BACKGROUND

Consensus Revenue Estimates

By law, the OPM secretary and OFA director must annually issue consensus revenue estimates by November 10 and any necessary consensus revisions of those estimates by January 15 and April 30. The estimates must (1) cover the current biennium and the three following years and (2) be the basis for the governor's proposed budget and the revenue statement included in the budget act the legislature passes.

Legislative Entrenchment

Legislative entrenchment refers to one legislature restricting a future legislature's ability to enact legislation. For example, CGS § 2-35 previously prohibited appropriations bills from containing general legislation. (This provision has since been repealed.) In Patterson v. Dempsey, 152 Conn. 431 (1965), the Connecticut Supreme Court held that this provision of CGS § 2-35 was unenforceable, writing that, “to hold otherwise would be to hold that one General Assembly could effectively control the enactment of legislation by a subsequent General Assembly. This obviously is not true, except where vested rights, protected by the constitution, have accrued under the earlier act. ”

Related Bills

sSB 1, reported favorably by the Planning and Development and Finance, Revenue and Bonding committees, establishes a mechanism for sharing state sales and use tax revenue in the Municipal Revenue Sharing Account with municipalities and the state's nine regional councils of government.

COMMITTEE ACTION

Finance, Revenue and Bonding Committee

Joint Favorable Substitute

Yea

27

Nay

21

(04/30/2015)