January 2017

Revenue Options are Key to Addressing Budget Shortfalls and Supporting Thriving Communities

Derek Thomas, M.P.A.

Long-term investments in children and families have been the cornerstone of the state’s prosperity. To preserve these investments and support long term economic health, a balanced approach to the upcoming biennial budget must include new resources.

The report finds three challenges with the current revenue system:

  1. Income tax collections on corporate profits in Connecticut have dropped from 13.2 percent of general fund revenues in 1991 to less than 4 percent of overall tax collections in 2015, mainly because of the growth of business tax credits and tax avoidance.

  2. Sales tax revenue decreased from nearly a third (31.9 percent) of total general fund revenue to a quarter (25.2 percent) in 2015 as a result of a failure to keep laws up to date with an economy that consumes far more services than it did 40 years ago.

  3. The overall state and local tax yields an effective tax rate that is higher for low-income than for wealthy taxpayers - increasing wealth disparity in a state already ranked third in terms of income and wealth inequality.

This report offers a set of revenue options for both the Governor and the Legislature to balance the budget with increased revenue, new strategic investments, and smaller budget cuts, and position the state for a more prosperous future. The report focuses on several possible options to modernize Connecticut’s tax system, either by expanding its base or by closing business tax breaks.

Apply sales tax to services $730 million to $1.5 billion
Collect a larger share of taxes due on internet sales $65 to $75 million
Apply the sales tax to digital downloads $7 to $11 million
Increase personal income tax by a half a percentage point for top earners $217.3 million
Higher rates on dividends and capital gains $141.8 million
Repatriation of deferred management fees To be determined
Join a regional compact to close the carried interest loophole $535 million
Improve enforcement of existing tax laws $40 million
Adopt throwback rule to eliminate "nowhere income" $12 to $25 million
Eliminate the corporate income tax capital base system and replace with a value-added tax as an alternative minimum tax To be determined
Renew efforts to regularly review business tax breaks To be determined
Enact sweetened beverage tax $85 to $141 million
Institute a low-wage employer fee $305 million

 

Issue Area:
Budget and Tax