2016 Legislative Session:
Connecticut's New Realities
By Connecticut Department of Revenue Services Commissioner Kevin Sullivan
ell, it's finally over. The 2016
legislative session and spe-
cial sessions were not easy
for anyone to follow. But it may just
turn out to mark a sea-change in how
Connecticut comes to terms with the
new economic and fiscal realities that
continue to challenge our state.
Fiscal Policy. Like many other states,
Connecticut is grappling with a slow
if certain economic recovery. More
importantly, the Great Recession
masked important changes fiscally
and financially. Most of the post-re-
covery jobs are in lower-earning sec-
tors of the economy. Our state GDP is
rising again, but much of the growth is
in traditional sectors rather than new
enterprises. As we age, net migra-
tion means losses in net income re-
placement. Above all, market volatility
means state tax volatility.
Fiscally, Connecticut is more reliant
than ever on income taxes and
especially the amount paid by the
highest-income taxpayers. Taxpayers,
individuals, and businesses are more
mobile than ever. While total state
tax revenues will be up over last year,
recurring deficits show how hard it is
to just keep up. On the spending side,
the state budget reflects decades
of mounting long-term fixed costs
for promised retirement and health
benefits as well as tax expenditures
in the form of credits, exemptions,
exclusions, net operating loss recovery,
and other abatements.
No wonder Governor Malloy set the
bar so high. When the session began,
he was clear that business as usual
just wasn't working. His message
was simple. No more kicking the
can further down the road. End the
"current services" budget autopilot.
No new taxes. Focus on core services.
Estimate revenues conservatively.
Continue making state government
smaller and smarter. Put the economy
first. Ask Democrats and Republicans
to put real ideas on the table.
At least two more difficult fiscal years
are ahead, but the new state budget
will make a difference. For the first time
in more than 40 years, General Fund
spending will be less than it is in the
current fiscal year. That's $825 million
in spending cuts. Yet overall town and
school aid still grows in order to help
hold down local property taxes. Simi-
larly, while scaled back from his initial
proposal, there will be net new invest-
ment in transportation improvements
that are vital to unlocking future eco-
No less important, the practice of
driving every new budget with hyper-
inflated estimates of "current services"
spending growth is over.
Tax Policy. There are no new taxes.
There are even some modest tax cuts.
Unfortunately, opportunities were
missed to level the playing field for
Connecticut businesses competing
with online sellers and close what
is probably a $100 million sales tax
gap. There's some new language
that claims to have DRS "facilitate"
collection warrants based on credit
and debit card payment settlement
information, but it really does nothing
new. Extension of the Angel Investor
tax credit for three more years makes
sense. Unfortunately, tax credits
and other tax expenditures continue
based on doubtful assumptions about
In terms of tax policy, the Governor
and Legislature completed a trifecta
of business tax reforms. Last session,
DRS strongly argued that the state's
corporate income tax perversely
favored out-of-state companies
earning profits here while disfavoring
Connecticut-based companies doing
business out of state. As a result,
legislation was enacted and signed
into law by Governor Malloy that
makes Connecticut both a unitary filing
and single (sales) factor apportionment
state effective for tax year 2016.
Now, 2016 legislation adds market
sourcing. In addition, starting in tax
year 2017, all Connecticut companies
other business entities as well as
corporations will benefit. Over the
coming weeks, DRS will be assisted by
a business tax advisory group to open
a dialogue and provide guidance for
implementation. Stay tuned.
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