State Revenue Solutions for Connecticut

Connecticut’s revenue system is failing to provide the funds we need to support the public structures that help maintain our quality of life – our schools, transportation systems, environmental protection agencies, and public safety agencies. The state’s revenue shortfall is serious, but manageable. Connecticut can adopt a more fair, reliable and accountable revenue plan by:

Increasing income taxes for those who can best afford it (increased revenues: $0.8 to 1.2 billion). Connecticut’s wealthiest families pay 4.7% of their income in state and local taxes (after federal tax deductions for state and local taxes).

By comparison, middle-income families pay 10.2% and low-income families pay 10.9% of their income in state and local taxes. Increasing income taxes for the wealthiest residents will help to make our tax system more fair and to close the state revenue gap. Adopting higher income tax brackets for married couple families over $200,000, as recommended by the Better Choices for Connecticut coalition, would raise an estimated $1 billion in additional revenue to close the budget deficit, while affecting less than 7% of Connecticut taxpayers. Notably, even with this rate increase, the share of income paid in state and local taxes by Connecticut’s wealthiest 5% would remain smaller than what is paid by the “bottom” 95% of Connecticut families.

Closing corporate tax loopholes. ($130 to 150 million) Flaws in our corporate tax code are part of our revenue problem, costing Connecticut hundreds of millions of dollars in tax revenues each year.

Close Connecticut’s “Las Vegas Loophole” ($100-120 million). Flaws in state tax accounting rules enable many multi-state companies to artificially shift profits to subsidiaries in other states like Nevada, which has no corporate income tax. This enables them to avoid paying their share of Connecticut taxes, and shifts responsibility for taxes onto locally-owned businesses and individuals.

Connecticut should level the playing field for businesses in Connecticut by requiring “combined reporting” tax rules that are already in place in at least 22 other states, including neighboring New York and Massachusetts. This reform will fix arbitrary and unfair corporate tax "loopholes" that increase our state revenue gap.

Re-apply the corporation business tax to “S-Corporations” with graduated rates to protect small businesses ($20-30 million). Because of other loopholes, many large corporations do not pay corporation business taxes. Many of these “S-Corporations” are major businesses. In 2003, 18 of the state’s 100 largest business paid only a $250 business entity tax, which applies to these S-Corporations and certain other classes of businesses. Requiring that large corporations pay the corporation business tax, and establishing lower, graduated rates for small businesses, will result in a more fair and broad-based tax system.

Scaling back public subsidies to the entertainment industry ($90 to 100 million). Connecticut’s blank check to the entertainment industry is part of our state budget problem. The State of Connecticut is excessively generous to film companies, paying for 30% of the cost of making movies, regardless of how much income tax the companies owe the state. The costs of these film tax credit subsidies far surpass the amount given in tax credits to any other industry. These film subsidies are a blank check. There is no cap on the amount of money the state can lose through these tax credits.

The State’s own study, conducted by the Department of Economic and Community Development, estimated that the tax credits do not pay for themselves. For every dollar the State spends on film tax credits, it only gets back 20 cents, a loss of 80 cents on the dollar. (The study estimated 6 cents in increased revenues and 13 cents in budget savings would result from the tax credit expenditures.) Setting a cap on Connecticut’s film tax credits will begin to set some reasonable limits on the program and help to close our state revenue gap.

Increasing the sales tax by one percentage point ($575 to 625 million). We can also limit any harmful effects of this increase by creating a state earned income tax credit (EITC) to help working families (cost of $50 million) and a small business property tax credit (cost of $100 million). Both the small business credit and a state EITC would also act as an economic stimulus.

Increasing cigarette and alcohol taxes ($78 to 80 million). Increasing cigarette taxes will not only raise revenue, it will discourage smoking, particularly among Connecticut’s children and youth, thereby reducing long-term health costs.