November 3, 2014

Legislative panel aims to re-think CT's tax code

Pablo Robles
Pablo Robles
In their second-ever meeting, members of the state's tax panel grappled with the enormity of their task: Assessing and making recommendations to improve the state's tax code for fairness and competitiveness. At right, invited guest Joe Brennan of the CBIA told panelists that there are things his member businesses like about the state's tax system, but that personal income and property taxes and the complexity of the sales tax are a regular concern.
Pablo Robles
Some members of the legislature’s tax panel listen as Joe Brennan of the Connecticut Business & Industry Association explains what tax changes his members would like to see enacted.
Pablo Robles
Joe Brennan of CBIA

For those who've lived in Connecticut for a while and pay close attention to the tax system, next year is going to be a bit of déjà vu.

As they were in 1989, legislators will again be facing a billion-dollar-plus budget deficit. And they'll perform a full evaluation of the state's tax code, based largely on the work and recommendations of a recently empanelled legislative task force whose main charge is to assess how fairly Connecticut's tax system treats businesses and residents.

It's a massive undertaking that hasn't been done in such grand scale in 25 years. And literally everyone in Connecticut is a stakeholder, as tax-code changes invariably result in winners and losers.

This week's gubernatorial election, too, will have a big impact on what ultimately happens to the tax panel's proposals.

William H. Nickerson, a former longtime Republican senator who is co-chairing the 15-member task force, said that the tax system has evolved so much in a quarter-century that taking in the view from 10,000 feet is appropriate, particularly given the constant barrage of "wrinkles and changes" requested by special interests each legislative session.

"This is a year we will step back and look at the whole universe," Nickerson said.

The last time the legislature embarked on such an in-depth tax code review—1989—it made one of its most controversial decisions in recent history: Creating a personal income tax.

Bill Cibes, who was Gov. Lowell Weicker's budget director and a key architect of the personal income tax, said he sees some similarity between 1989 and today. The idea 25 years ago was to figure out the fairest way to tackle the deficit, said Cibes, who isn't on the current panel but did attend a recent meeting.

"Everybody realized we ought to canvass all options," Cibes said.

Don't expect such a groundbreaking change this time around, but analysis of that tax will be a central part of the panel's purview, as will deep dives into corporate, property and consumer taxes.

Diverse group of experts

Lawmakers have empanelled a group of attorneys, CPAs, former legislators, professors and researchers to perform the tax code review; there is also a $500,000 budget to hire a consultant.

Sitting lawmakers and state officials are also panel members, but they don't have a vote. Still, legislators hold most of the cards since any recommendations won't be binding; the General Assembly and next governor will eventually have to approve any changes.

"We don't have the power to enact any of these things," Nickerson said.

Sen. L. Scott Frantz, (R-Greenwich), said the concept of using non-legislator subject matter experts is to get as many perspectives as possible. "People are keenly interested in making sure Connecticut has the right kind of tax burden distributed in equitable fashion," he said.

Of course, gaining consensus on what constitutes a fair tax system is easier said than done. Homeowners and businesses complain about the state's varied and relatively high property tax rates — a regular topic of contention for municipalities. Advocates for low-income families say the state's earned income tax credit and other protections are inadequate, while the wealthy don't like the personal income and gift taxes.

"Obviously [this is a] large charge," said panelist Al Casella, a partner with Hartford law firm Murtha Cullina, adding that he looks at the work ahead with "a mix of excitement and trepidation."

At a meeting held last week at Central Connecticut State University, panelists' hoped to better define their mission and purpose, but they didn't get far. Instead a discussion with several invited guests — including representatives from the Connecticut Business & Industry Association (CBIA), the Business Council of Fairfield County (BCFC), and a former Yale economist — lasted for more than 90 minutes.

Asked if the state should cut incentives for individual companies and instead reduce the tax rate for all business, longtime CBIA lobbyist (and incoming president) Joseph Brennan hedged his answer.

United Technologies' recent $400 million tax-credit deal is positive because it supports an entire ecosystem of suppliers, he said. But, "you could also pick a lot of deals over the past 20 years that maybe didn't make sense," he added.

BCFC Public Policy Vice President Joseph McGee encouraged the panel to tweak the tax code to encourage investment around infrastructure — specifically at train stations along the expanding New Haven-Hartford-Springfield rail line.

And economist Nick Perna urged panelists not to forget about a growing income gap between rich and poor that he said is a threat to the state's economy. He also told them there are many important factors they can't control — namely federal tax policy and the national economy.

Putting political agendas aside

Nickerson kicked off the panel's first meeting in late September by asking panelists not to view the discussion through a political lens.

Much of what the panel will look at, however, has bubbled up in the politically divisive gubernatorial campaign between Gov. Dannel P. Malloy and Tom Foley, including the appropriate level of taxation on businesses, homeowners and the wealthy; the variability of motor vehicle taxes by municipality; and how effective it is to provide loans and grants to select businesses, to name a few.

Panelists say they are bringing open minds to the process.

Panelist Donat C. Marchand, an attorney with Ivey, Barnum & O'Mara in Greenwich, handles tax, real estate, and estate law. He considers himself apolitical, but was happy to relay some of his clients' general complaints.

"Income taxes are too high, the state exemption of $2 million is too low, and there shouldn't be any gift taxes," said Marchand, adding he has "no preconceived notions" of what the panel should or shouldn't recommend.

The state's gift tax — the only one of its kind in the country — came up in several interviews with attorneys on the panel.

Christiana N. Gianopulos, a trusts and estates lawyer at Day Pitney in West Hartford, said she has seen clients relocate because of it. "I would be surprised if any trusts and estates lawyer in Connecticut had not seen that happen," she said.

Casella, the Murtha Cullina attorney, said he wants a better look at taxes on the wealthy.

The potential relocation of rich residents is a major concern because they pay a large portion of the state income tax, according to Kevin Sullivan, commissioner of the Department of Revenue Services and a non-voting panel member.

In fact, wealthy residents are so important that DRS "tracks 20 individual taxpayers on income tax just so we can tell how things are going to go," Sullivan said.

But if the rich feel slighted, consider this: A study last year by the Institute on Taxation and Economic Policy found that lower- and middle-income residents pay a higher percentage of their wages to the income tax than do the wealthy.

As if the panel's charge wasn't broad enough, it has one more thing to look at: the feasibility of making nonprofits and hospitals pay some level of property taxes.

It's an idea that was floated by House Speaker Brendan Sharkey (D-Hamden), an ex-officio member of the panel, earlier this year. Sharkey's bill was met with fierce resistance from nonprofits and a number of his fellow Democrats; the proposal ultimately died in the Senate.

"I've been around the legislature long enough to know that the idea of taxing nonprofits is explosive," Nickerson said.

The panel must issue its recommendations no later than Jan. 2016.

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