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Sale ales Ta Taxat ation on in in Connec nnecti ticut Co Conn nnecticut St State Ta Tax x Pa Pane nel William illiam F. Fox, Dire irector Center for Business and Eco Cen Economic Res Research ch Has aslam lam Colle llege

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William illiam F. Fox, Dire irector Cen Center for Business and Eco Economic Res Research ch Has aslam lam Colle llege of Business Th The e Univer ersity of Ten Tennessee, , Knoxville

Sale ales Ta Taxat ation

  • n in

in Connec nnecti ticut

Co Conn nnecticut St State Ta Tax x Pa Pane nel

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 Revenue elasticity has been very low over the

past 15 years (0.22), low over the past decade (0.57) and has been negative for three of those years.

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 2

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SLIDE 3

0.0 500.0 1,000.0 1,500.0 2,000.0 2,500.0 3,000.0 3,500.0 4,000.0 4,500.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Millio illions

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 Revenue elasticity has been very low over the

past 15 years (0.22), low over the past decade (0.57) and has been negative for three of those years.

 Generates 25% of state tax revenues – low on

national standards

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 4

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Per ercent o t of f Tax Reven enues es

Sales Selective Sales Individual Income Corporate Income

25.0% 17.6% 48.8% 3.9%

4.7%

Figure 1: Percent Distribution of Connecticut State Tax Revenues, 2014

Source: http://taxadmin.org/fta/rate/14taxdis.html

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SLIDE 6

 6.35% standard tax rate - below national 6.9

state/local median rate

  • Connecticut imposes 7 sales tax rates, which is

high on national standards

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 6

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SLIDE 7

Greater than 6%

  • -15--

5% to 6%

  • -19--

Less than 5%

  • -11--

None

  • -5--
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 6.35% standard tax rate - below national 6.9

state/local median rate

  • Connecticut imposes 7 sales tax rates, which is

high on national standards

 Connecticut’s collected sales tax base (27.9%)

is narrow relative to national standards (36.8%), but only Maine is broader among northeast states.

 Taxation of services is relatively broad

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 8

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SLIDE 9

Greater than 48.0%

  • -11--

36.8% to 48.0%

  • -12--

Less than 36.8%

  • -22--

No sales tax

  • -5--

U.S. = 36.8%

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SLIDE 10

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

19791981198319851987198919911993199519971999200120032005200720092011

Sal ales Tax ax B Bas ase as as Share of Personal Incom come

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 Tax all household purchases, regardless

  • How obtained
  • Where obtained
  • Who is the seller

 Exempt business purchases  Destination tax

  • Tax out-of-state purchases, including e-

commerce, cross border shopping, etc.,

  • Exempt out-of-state sales

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 11

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 CT provides 49 exemptions, many of which

are intended to move the sales tax from a tax

  • n all transactions to a tax on consumption.

 $243.6 billion total value of exemptions  72% of exemptions are for intermediate

purchases and out-of-state sales

 But, the exemptions mean that tax can

depend on who buys, what they buy, who they buy from, where they buy, and how they buy

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 12

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 Distributes tax burden proportionally to

consumption

 Allows a lower revenue neutral tax rate  Enhances horizontal equity  Limits effects of the sales tax on behavior

BUT

 May tax purchases that are not taxable in

  • ther nearby states, and creates problems for

some in-state businesses

 Vertical equity? DRS indicates

  • 5.81% burden for lowest decile
  • 0.17% for highest decile

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 13

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 Fast growing service consumption, and

particularly health care

 E-commerce – tax consumption the

same regardless of how acquired

  • SSTGB
  • More expansive nexus definitions
  • Work with others in challenge of Quill

 Tax digitized media

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 14

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$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Bill illions

Total Business to Consumer (B2C) Total Business to Business (B2B)

15

*Sales-taxing states only.

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 Perhaps 35% of CT sales tax on business

purchases, which is low on national standards

 Case for exemption:

  • Taxes production, and could discourage firm

locations/production

  • Encourages vertical integration
  • Harms small business
  • Cascades into higher product prices

 But if exempt:

  • Bases tax on purchaser and can raise compliance

costs and fraud

  • Requires a higher tax rate – over 8 percent

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 16

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 Pol

  • licy O

Opti ption 1: Red Reduce t the n e number of sa sale les s tax ra rates.

  • s. O

One ra rate is is pre referr rred, though t the s e state m e may want t to lev evy separate e taxes es o

  • n i

items p purcha chased ed heavily b by tour urists ts, s such ch as a hotel el o

  • r

rental al c car ar tax ax. .

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 17

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 Tax additional goods

  • Food other than meals
  • Tax holidays

 Tax additional services

  • Residential utilities
  • Residential repairs and

renovations

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 18

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 Policy Option 2: Impose

se t the sa sale les t s tax

  • n a

all fo ll food purchases, s, re regard rdless ss o

  • f

f whether re r regard rded a as s part rt o

  • f

f a meal. l. Purchases m s made w wit ith fo food st stamps would rem emain exe exempt u under a any policy c chan ange.

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 19

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 Policy Option 3: Elim

liminate t the sa sale les s tax h holid liday. y.

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 20

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School & Energy / Hurricane-related

  • -7--
  • School-related
  • -8--

No Holiday

  • -28--

No Tax

  • -5--

Everything*

  • -2--

Louisiana has 3 holidays: 1) hurricane prep; ii) hunting supplies; and iii) all tangible personal property.

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SLIDE 22

 Policy Option 4: Bro

roaden t the sa sale les s tax to more re se servi rvices use sed b by consumers rs, inclu ludin ing r residentia ial u l utilit litie ies s and re repairs s to re resid sidential re real p l pro roperty.

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 22

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 Exemption for transactions between

wholly owned subs and parent

 Other business services

  • Employment/training services
  • Computer services
  • Lobbying and consulting
  • Business analysis

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 23

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 Policy Option 5: Reduce t

uce taxation o n of inter ermed ediate s te services ces and p particu cularly employmen ent and c comput uter er s services ces.

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 24

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 Policy Option 6: Le

Legisl islate a a le less ss string ngent ent o

  • wner

nershi hip r rule e for exemption w when se servi rvices s are re so sold ld between een a a parent nt and a a subsidiary.

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 25

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 Policy Option 7: Elimina

nate t te the e exem emption fo for sa r sale les t s to not not-for

  • r-pro

rofit fit organ anizat ations exc except when t the p purchases a are u e used ed to pro roduce goods a s and se servi rvices t that a are re sa sale les s taxed w when p pro rovi vided t to benef nefici ciaries es, o

  • r add a

a requi uirem emen ent that t the e not not-fo for-pro rofit fit orga gani nizations ns m meet t certain criteria evidencing that their work is in the p e public i interest.

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 26

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 Not-for-profits

  • Distinguish between philanthropic

and service providing?

  • Provide the same exemptions for

intermediate goods that other businesses face

 Governments – why exempt sales to or

sales by governments?

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 27

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SLIDE 28

 Policy Option 8: Impose

se t the sa sale les t s tax

  • n s

sales t to go gover ernm nment ent entities es.

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 28

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 Policy Option 9: Lev

evy the s e sales es tax o x on sa sale les b s by gove vernment in in case ses w s where the p public a c activiti ties es c compet ete w e with t th the private sector, such as parking.

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 29

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 Policy

cy Option 10: Join t n the e Strea eamlined ned Sales es Ta Tax x Governing Bo Board.

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 30

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 Policy Option 11: Connecti

nnecticut ut s shoul uld conti ntinue t ue to inves esti tiga gate a e and wher here e poss ssible le legisl islate a a more re e expansi sive definition o n of nexus xus.

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 31

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 Pol

  • licy O

Opti ption 13: Tax digitized downl nloads f for c cons nsum umpti tion, n, such a ch as books, video and music at 6.35%.

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 32

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 Sharing economy

  • Tax consumption
  • Similar taxation, particularly for

highly substitutable items

  • Sector changing rapidly, which

means must move cautiously into new legislation

  • Use the organizing company to

comply with the tax

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 33

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 Pol

  • licy O

Opti ption 12: Use companies

  • rgan

anizing t the s shar aring e economy f y for enforcem cemen ent and r remitt ttance o nce of the sal ales t tax ax. .

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 34

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 Policy Option 14: Ask the Department of

Revenu enue S e Services ces t to c caref eful ully review ew t the e sharing eco economy t to en ensure t that cons nsisten ent t taxation i is occur ccurring ng between een the s sharing a ng and digi gitized ed eco cono nomies es a and tradit itio ional l economy.

  • my. E

Enact l legisla latio ion where n nece ecessary to en ensure t that n neu eutral taxati tion i n is occur ccurring. g.

William F. Fox • Center for Business and Economic Research • http://cber.bus.utk.edu 35