Exemptions and tax credits are contributing to the state”™s looming budget deficit, but getting rid of some of those breaks could help cure the disparity, according to a new report by the University of Connecticut.
“The money takes the form of tax exemptions, taxes Connecticut could collect on goods and services but chooses to do without,” said Arthur Wright, emeritus professor of economics at UConn who co-authored The Connecticut Economy report.
He said there are about $5 billion worth of non-appropriated tax expenditures. Wright suggested that lawmakers take a look at the potential of these tax expenditures to close the budget deficit. But he cautioned that “they”™re hard to define, slippery to measure and widely scattered throughout the tax code ”“ with many resulting beneficiaries and hence potential political defenders.”
Wright said in finding which exemptions to keep and which to do away with a slogan should be affixed: “There will be pain.”
“This could reduce meddling by the state of Connecticut in the business decisions of corporations,” Wright said. By looking at eliminating a number of the exemptions and credits, the state could broaden the tax base for business and decrease the tax rate, he said.
Joseph Brennan, senior vice president of the Connecticut Business and Industry Association, said the state legislature looks at tax exemptions and tax credits every year. Brennan said he would be interested in an appraisal of the value of these exemptions and credits and their effects on businesses.
Many of the state”™s manufacturing companies are the basis of the exemptions and tax credits, and charging a sales tax on materials or machinery used in the manufacturing process would be, “detrimental to the industry,” Brennan said.
“The only way out of this fiscal mess is by supporting economic growth,” he said. “Eliminating some of these exemptions will stifle that growth and the savings won”™t be enough to plug the estimated $3.67 billion in deficit.”
Brennan said if the General Assembly begins to think about eliminating some of the exemptions, the CBIA will be there to offer support to the manufacturers.
During his campaign, Gov.-elect Dan Malloy spoke about the need to evaluate all tax expenditures, in the shadow of such massive state budget shortfalls.
“Clearly, we are in uncharted waters,” said Joan McDonald, commissioner of the state Department of Economic and Community Development. “Business as usual is not an option for Connecticut.”
McDonald has the daunting task of evaluating the state”™s economic strategic plan for each of the next three fiscal years.
Wright said the largest chunk of exemptions are from sales and use taxes, which make up about 56 percent of the tax expenditures. Many of these uncollected taxes are on items most people are unaccustomed to paying taxes on such as food items at the grocery store.
Based on data from the Office of Fiscal Analysis, the report found the estimated revenue loss from these exemptions to be $375 million from food purchases alone. Untaxed sales to nonprofit organizations represent about $700 million. Sales tax for motor vehicle fuel makes up another $400 million; the tax at the pump is a separate usage tax for maintaining roads and bridges. The exemption on motor vehicle fuel sales tax is rationalized by the state as being redundant.
Personal income tax credits, such as the property tax credit and Social Security benefits, total $590 million a year.
