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January 27, 2014

Lawmakers push tax reform talks

Photo | HBJ File

State legislative leaders on both sides of the aisle agree Connecticut must reform its tax code.

While the issue likely won't be addressed until 2015 — after the upcoming November election, and when the next state budget needs to be adopted — legislators say they plan to lay the groundwork for reform during the upcoming legislative session that starts Feb. 5.

“There is a day where Connecticut is going to have to deal with its tax policy,” Gov. Dannel P. Malloy said in a recent interview. “Listen, I want to cut taxes. Who wouldn't want to cut taxes?”

While Democrats and Republicans have differing views on tax reform, both agree Connecticut's budget must be less susceptible to the ebbs and flows of the economy. The state's reliance on income and sales taxes often leads to budget shortfalls during recessions, and surpluses during good economic times, making it hard to create a stable, long-term fiscal policy.

Both parties also agree property taxes are too high. Republicans want to fix that by reducing unfunded mandates on cities and towns, while Democrats are pushing for municipalities to regionalize more services.

Republicans say wealthy residents also shouldn't be penalized, but agree with Democrats in supporting a more progressive corporate tax rate, that could provide some relief to small businesses.

“Corporate taxes tend to be paid for by small and medium-sized businesses,” said Sen. Minority Leader John McKinney (R-Fairfield). “We need to look at overhauling our tax structure.”

To lay the groundwork for tax reform, lawmakers this session must study tax credits to see which ones are effective in promoting job growth and business retention and which ones are not, said House Speaker Brendan Sharkey (D-Hamden).

“We can't start these things next [year]. These conversations have to begin now,” Sharkey said.

The legislature also needs to commission studies of the sales, income, and corporate taxes to determine what Connecticut wants to accomplish economically and how those taxes can be changed to accommodate that, Sharkey said.

“We need to make sure the tax system we have in this state aligns with the government we need for this state,” Sharkey said.

One of Sharkey's pet projects is finding regional efficiencies for local services in order to consolidate the size of municipal governments. The overarching goal is to reduce the state's property tax burden, which hits businesses particularly hard and accounts for about 40 percent of all taxes collected in Connecticut, he said.

The Municipal Opportunities Regional Efficiencies Commission is studying changes like a statewide special education system to relieve the funding burden on local school systems.

“Property taxes: that is a big issue for businesses,” said Bonnie Stewart, vice president of government affairs for the Connecticut Business & Industry Association. “The property tax burden on businesses is significant.”

In addition to making government more efficient, Connecticut needs to look at the unfunded mandates placed on local governments that cause cities and towns to boost property taxes for extra revenue, Stewart said.

While any tax overhaul needs to be business-friendly, Malloy said it's important the state keep its social safety net, which helps struggling families and residents, but adds to the expense of government services.

Maintaining the social safety net was a key component of Malloy's 2011 budget, which raised taxes by about $1.5 billion to close a $3.6 billion budget deficit.

If a tax overhaul is achieved, Malloy said he'd also like a legislative package that supports working families and job creation. Malloy, whose term would end before the 2015 legislative session, hasn't declared his intention to run for re-election yet, although it is presumed he will.

McKinney, who is running for governor, said reducing the size of the state budget in 2015 will be a key to tax reform. While light on specifics, McKinney mentioned making state government more efficient, getting rid of anti-business laws like paid sick leave, and repealing unfunded mandates for local governments.

“We need to get our fiscal house in order,” McKinney said.

From an employer's perspective, having a more consistent fiscal and tax policy will encourage private investment in Connecticut, Stewart said.

The CBIA will push lawmakers to end the 20 percent corporate tax surcharge, which was supposed to sunset in June but was extended through fiscal year 2015. Stewart said businesses want the corporate tax rate back to where firms are paying just 7.5 percent of their net income attributable to Connecticut.

“They need to ensure there is stability and predictability in our tax structure,” Stewart said.

McKinney said he also favors overhauling the estate tax, which is forcing wealthy people to move out of Connecticut. As a result, the state budget gets less in personal income tax and other related benefits from having wealthy people in the state.

Some state taxes have already been rolled back from 2011 when Malloy and the legislature instituted a two-year, $1.5 billion tax increase. The tax on power generators expired in October, and the sales tax exemption on clothing will be reinstated in July, Malloy said.

Ultimately, what happened with Connecticut's tax collections and fiscal situation over the last five years must be stopped, Sharkey said. The state needs more consistent cash flow, so major tax increases or budget cuts aren't needed when the economy sours.

Tax reform should be a bipartisan effort, Sharkey said. “The biggest problem with our current tax system is it is so volatile,” Sharkey said. “Everybody agrees something needs to be done.”

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