OFFICE OF FISCAL ANALYSIS

Legislative Office Building, Room 5200

Hartford, CT 06106 (860) 240-0200

http://www.cga.ct.gov/ofa

sSB-946

AN ACT CONCERNING REVENUE ITEMS TO IMPLEMENT THE BIENNIAL BUDGET.


OFA Fiscal Note

State Impact: See Below

Municipal Impact: See Below

Explanation

Summary

The bill raises General Fund revenue of $1,004.5 million in FY 16 and $579.4 million in FY 17 primarily from taxes. When the General Fund revenue impacts of other specific initiatives are included, the total surplus over the 2016 – 2017 Biennium is approximately $41.5 million.

General Fund (GF) Budget ($ - millions)

 

FY 16

FY 17

Total

sSB 946 Total

1,004.5

579.4

 

Taxes

949.0

480.9

 

Other

55.5

98.5

 

Hospital Tax Update

160.5

160.5

 

Amortization of GAAP

(47.6)

(47.6)

 

Federal Grants impact of sHB 6824

(5.1)

(13.3)

 

Total Revenue (based on April Consensus)

18,472.6

18,728.2

 

Net Appropriations

18,286.2

18,873.1

 

Surplus / (Deficit)

186.4

(144.9)

41.5

The FY 16 tax revenue increase is distributed about equally between the Personal Income, Sales & Use and Corporations taxes (at approximately 30% each). However, this distribution changes significantly in accordance with the bill as the Sales & Use Tax rate is reduced in FY 17 and the Corporations Tax surcharge phases out after the 2016 – 2017 Biennium. The Personal Income Tax makes up between 63% and 74% of the total tax revenue increases under the bill in FY 17 and afterwards, as illustrated in the table below.

Other significant effects of the bill shown in the table below are the growing transfers from the General Fund to the Special Transportation Fund after the 2016 – 2017 Biennium and the re-establishment of the Municipal Revenue Sharing Account (MRSA) to provide grants for municipal purposes.

Summary Impact of sSB by Revenue Categories and Major Funds / Accounts over the 2016 – 2017 Biennium and into the Out Years ($ - millions)

 

FY 16

FY 17

FY 18

FY 19

FY 20

Personal Income

308.6

303.2

315.9

332.3

359.4

Sales and Use

320.8

(5.7)

(5.1)

(5.3)

(5.5)

Corporations

281.8

202.8

188.5

125.0

130.0

Insurance Companies

22.7

22.7

-

-

-

Alcoholic Beverages

.2

.2

.2

.2

.2

Health Provider

4.0

(53.2)

2.8

2.8

2.8

Miscellaneous

(.1)

(.1)

(.1)

(.1)

(.1)

Earned Income Credit

(11.0)

(11.0)

-

-

-

Subtotal: Taxes

949.0

480.9

502.2

454.9

486.8

Other Revenue

26.2

45.0

45.0

45.0

45.0

Other Sources

29.3

53.5

(103.0)

(246.0)

(391.0)

Total GF

1,004.5

579.4

444.2

253.9

140.8

           

Transfers from the GF to the Special Transportation Fund

-

(25.0)

112

255

400

MRSA

294.2

408.9

424.4

440.1

456.0

In order to administer the tax provisions of the bill, the Department of Revenue Services (DRS) would need 14 additional staff members and associated expenses. The annualized cost of these new positions, including expenses and fringe benefits, is approximately $1.2 million. In addition, one-time costs to update the online Taxpayer Service Center and internal Integrated Tax Administration System as well as tax form alteration and printing costs of approximately $775,000 would be incurred in FY 16.

In addition to the cost of tax administration incurred by DRS, the bill is anticipated to result in a significant debt service cost to the state in the future due to the provision within Section 108 that requires Connecticut Innovations, Inc. to issue Tax Increment Financing bonds for development in Hartford. These types of bonds are General Obligations of the State.

Section-by-Section Analysis

     

($ - millions)

Sec.

Action(s)

Fund

FY 16

FY 17

1

Establishes a new top marginal rate of 6.99% in the Income Tax for those tax filers with CT Adjusted Gross Incomes over certain thresholds.

General

131.9

118.4

1

Establishes a 2% supplemental tax on all capital gains income for those tax filers with CT Adjusted Gross Incomes over certain thresholds.

General

167.6

178.0

2-4

Delays the scheduled increase in the personal exemption for Single Filers of the Income Tax from $14,500 to $15,000.

General

15.1

10.8

5

Delays the scheduled restoration of the state's Earned Income Tax Credit (EITC) rate to 30% from 27.5% of the federal EITC.

General

11.0

11.0

6

Increases, from 50% to 100%, the Income Tax exemption for military retirement pay.

General

(6.0)

(4.0)

7-8

Extends the 20% surcharge on the Corporate Income Tax for certain filers and phases out the surcharge after the FY 16 and FY 17 Biennium.

General

44.4

75.0

9

Delays the scheduled expiration of the two lower tiers of caps on credit utilization against the Insurance Premiums Tax.

General

18.7

18.7

10

Delays the scheduled expiration of the moratorium on the issuance of new film tax credits, which may be applied to the Insurance Premiums Tax.

General

4.0

4.0

11-15

Re-establishes a municipal share of the Sales and Use Tax at a rate of 0.5%.1 Substitute for Senate Bill 1 provides for the distribution of these funds.

Municipal Revenue Sharing Account

289.8

402.7

11-17

Reduces the rate of the state's portion of the Sales and Use Tax from 6.35% to 5.85% and then to 5.35%.

General

(252.7)

(702.4)

18

Eliminates the Sales and Use Tax exemption for services related to web sites that are part of the World Wide Web.

General

45.5

57.8

18

Expands the scope of the Sales and Use Tax to include 26 additional professional services.

General

272.0

345.5

18-20

Increases the Sales and Use Tax rate for computer and data processing services from 1% to the standard rates, as adjusted pursuant to sections 11-17.

General

116.6

148.2

21

Reduces, from $300 to $100, the per-item exemption from the Sales and Use Tax during the “Sales Tax Free Week.”

General

1.0

1.0

22

Limits the use of loss carryforwards against the Corporate Income Tax to 50% of net income in any income year when computing the amount of tax due.

General

156.3

90.1

23

Lowers, from 70% to 50.01%, the maximum percentage to which tax credits may be used against the total liability under the Corporate Income Tax.

General

42.5

34.0

24

Limits the use of tax credits against a liability under the Hospital Tax to 50.01% of the total.

General

4.0

2.8

25

Reduces the biennial “Business Entity Tax” fee from $250 to $125.

General

0.0

(20.0)

26-28

Increases, from $20 to $100 per year, the annual fee imposed on pass-through entities to file an annual report with the Secretary of the State.

General

10.0

12.8

29

Diverts the scheduled transfers from the Tobacco Settlement Fund to the Tobacco Health Trust Fund during the FY 16 and FY 17 Biennium. Permanently reduces, from $12 million to $6 million, scheduled transfers in FY 18 and thereafter.

General

12.0

12.0

29

Diverts the first scheduled transfer from the Tobacco Settlement Fund to the Smart Start competitive grant account.2

General

5.0

0.0

Municipal Grants

(5.0)

0.0

30

Reduces the scheduled transfer to the Special Transportation Fund (STF) in FY 17. In addition, increases the scheduled transfer to the STF by $112 million in FY 18, $225 million in FY 19, and $400 million in FY 2020

General

0.0

25.0

Special Transportation

0.0

(25.0)

31

Diverts a portion of revenue from the Community Investment Account during the 2016-2017 Biennium.3

General

6.75

13.5

32

Transfers part of the balance of the Private Occupational Student Protection Account.4

General

2.5

0.0

33

Permanently diverts 3/5 revenue from the Municipal Video Competition Account.5

General

3.0

3.0

Municipal Grants

(3.0)

(3.0)

34-37, 110

Shifts revenue from the Palliative Marijuana Account which is generated by fees imposed for growing, distributing and use of palliative marijuana.

General

0.6

0.6

38-40

Authorizes (effective upon passage) certain entities to sell sealed containers of draught beer i.e. “growlers”, which is anticipated to increase the volume of beer consumed.

General

1.8

1.8

41-44

Authorizes keno gaming, which is anticipated to generate revenue through direct sales of the keno game in addition to having an indirect positive impact on lottery ticket sales.

General

13.6

30.0

45

Limits the applicability of the rental surcharge to people or businesses generating at least 51% of their total annual revenue from rentals.

General

(0.1)

(0.1)

46-49

Requires manufacturers and sellers of electronic nicotine delivery devices to register with the Department of Consumer Protection and annually renew their registration accompanied by fees.

General

2.0

1.6

50-75

Increases license renewal fees by $5 for various professionals licensed by the Department of Public Health (DPH). Revenue collected from the increase is to be transferred to the newly established professional assistance program account for DPH to provide grants- in-aid to program providers and medical review committees under the assistance program of health care professionals.

Professional assistance program Account

0.6

0.7

76-101

Implements mandatory combined reporting under the Corporation Business Tax.

General

38.6

23.7

102-107

Establishes an ongoing, potential revenue diversion from the General Fund to the Budget Reserve Fund based on revenue trends. More details below.

Budget Reserve “Rainy Day” Fund; General

None

Potential

108

Requires Connecticut Innovations, Inc. to issue Tax Increment Financing bonds to support development in downtown north Hartford, which would result in a state General Fund cost to service the debt in the future.

General

None

Potential Cost

109

Requires the Department of Social Services to refund a portion of the Hospital Tax.

General

0.0

(56.0)

111

Eliminates the Sales and Use Tax exemption for clothing and footwear costing less than $50.

General

136.8

142.6

Further Information on Sales Tax Changes

The bill restores funding to the Municipal Revenue Sharing Account by establishing a separate “municipal revenue” Sales and Use Tax rate effective October 1, 2015. The bill adjusts the state revenue portion of the Sales and Use Tax rate by reducing it over time. See below for an illustration of how these two separate rates interact.

Total Effective Sales Tax Rates per the Bill

 

Current

7/1/2015 – 9/30/2015

10/1/2015 - 6/30/2016

7/1/2016 thereafter

State Revenue

6.35%

6.35%

5.85%

5.35%

Municipal Revenue

0%

0%

0.5%

0.5%

Total

6.35%

6.35%

6.35%

5.85%

The bill raises several hundred million dollars in tax revenue by repealing certain exemptions from the Sales and Use Tax and expanding the scope of the Sales and Use Tax to include more professional services.

Partial / Full Exemptions to be Eliminated ($ - millions)

   

FY 16

FY 17

Computer & Data Processing

Eliminate the reduced rate (1.00%) of taxation

116.6

148.2

World Wide Web

Eliminate the exemption

45.5

57.8

Clothing & Footwear Costing Less than $50

Eliminate the exemption

136.8

142.6

Sales Tax Holiday

Reduce the per-item exemption from $300 to $100

1.0

1.0

TOTAL

299.9

349.6

Additional Professional Services to be Subject to Sales and Use Tax ($ - millions)

Pursuant to Section 18 of the Bill, Effective 10/1/15

FY 16

FY 17

Offices of Certified Public Accountants

44.1

56.0

Other Accounting Services

10.5

13.4

Architectural Services

16.0

20.4

Engineering Services

73.0

92.5

Drafting Services

0.5

0.6

Building Inspection Services

1.3

1.6

Geophysical Surveying and Mapping Services

1.8

2.3

Surveying and Mapping (except Geophysical) Services

3.3

4.3

Additional Professional Services (cont.) to be Subject to Sales and Use Tax ($ - millions)

Interior Design Services

4.5

5.7

Industrial Design Services

1.0

1.3

Other Specialized Design Services

0.8

1.0

Administrative Management and General Management Consulting Services

30.4

38.6

Human Resources Consulting Services

4.6

5.9

Marketing Consulting Services

9.1

11.6

Process, Physical Distribution, and Logistics Consulting Services

4.3

5.4

Other Management Consulting Services

1.0

1.3

Other Scientific and Technical Consulting Services

4.4

5.6

Direct Mail Advertising

6.6

8.4

Advertising Material Distribution Services

2.2

2.8

Marketing Research and Public Opinion Polling

9.5

12.0

Translation and Interpretation Services

1.6

2.0

Veterinary Services

17.1

21.8

All Other Professional, Scientific, and Technical Services

3.0

3.9

Other Gambling Industries

5.1

6.5

Golf Courses and Country Clubs

11.9

15.1

Dry cleaning and Laundry Services (except Coin-Operated)

4.4

5.5

TOTAL

272.0

345.5

Further information on the Budget Reserve Fund Provisions

Beginning in FY 17, the bill establishes a transfer of General Fund (GF) revenue to the Budget Reserve Fund (BRF) and the State Employees Retirement Fund (SERF), which is determined by a statutory formula. This results in a potentially significant diversion of revenue from the GF to the BRF and SERF in FY 17 and annually thereafter.6

In order for a revenue transfer to be triggered, total “combined revenue”7 must be in excess of a calculated threshold based on the average difference (as a percentage) between actual revenue and the ten year average. The bill allows for the threshold to be adjusted for changes in tax policy that impact the corporation business tax or the personal income tax.

Based on current revenue estimates the bill will not result in a GF revenue transfer until FY 18, at which point approximately $10 million will be diverted. Under this scenario, the FY 17 threshold is $5,086 million while combined revenue is $4,930 million, or approximately $156 million less than the threshold. Due to the historical volatility of combined revenue the bill may still result in a transfer from the General Fund in FY 17 depending on actual revenue collected.

Based on historical data, the transfer of GF revenue to the BRF and SERF may exceed $800 million in a fiscal year. The table below compares actual deposits into the BRF to deposits that would have occurred under the provisions of the bill.

FY

Actual Deposit into BRF $

Transfers as Calculated Under the Bill $

04

302,200,000

24,557,248

05

363,900,000

433,646,700

06

446,500,000

697,097,504

07

269,200,000

815,841,033

08

-

818,479,382

09

-

-

10

(1,278,500,000)

-

11

(103,200,000)

-

12

93,500,000

74,994,072

13

177,200,000

200,364,682

14

248,500,000

-

The breakout of the transfer from the GF to the BRF or SERF varies based on the amount of funds currently in the BRF relative to total GF appropriations, which is illustrated in the table below.

BRF Balance / Appropriations

Budget Reserve Fund

State Employees Retirement Fund

0 to 5%

95%

5%

5 to 10%

90%

10%

10 to 15%

85%

15%

Greater than 15%

0%

100%

The ongoing fiscal impact identified above would continue into the future subject to the degree in which actual revenues exceed the threshold calculated by the formula. The bill also increases the maximum amount allowed to be in the BRF from 10% to 15% of appropriations. This allows for additional funds to be transferred from the GF to the BRF.

1 Municipalities previously had shared in 0.1% of the Sales and Use Tax during FY 12 and FY 13 only. These funds were deposited into the Municipal Revenue Sharing Account and distributed according to statute.

2 Section 138 of PA 14-217, established an annual revenue diversion of $10 million from FY 16 to FY 25 in order to provide grants-in-aid to towns for the purpose of establishing or expanding preschool programs.

3 The Community Investment Account is a separate, non-lapsing state fund established by PA 05-3 to fund a variety of programs. As of 2/27/15 the account had a balance of $48.3 million. Annual revenues are approximately $27 million.

4 CGS 10a-22u requires each private occupational school to pay of 1% of its quarterly net tuition revenue to the State Treasurer for deposit into a special account from which students can get tuition reimbursement if a school fails. The account had a balance of approximately $6 million earlier this year.

5 CGS 16-331bb requires the State Comptroller to deposit up to $5 million each fiscal year from the Gross Earning Tax on certified video service providers (i.e., certain cable TV companies) to be distributed to municipalities for property tax relief. Funds are allocated by a ratio of total number of subscribers to competitive video service in a given town to the total number of such subscribers in the entire state. The 2014-2015 Biennial Budget eliminated this transfer entirely in each fiscal year to help balance the General Fund budget.

6 Per the bill, BRF revenue can be accessed in the event of a decrease in GF revenue greater than 2% over the prior year (for example, during a recession).

7 For the purposes of the bill “combined revenue” is equal to the sum of: 1) the corporation business tax, and 2) the estimated & final payments portion of the personal income tax.