Taxing Smarter: Proposals for Increased Accountability and Transparency in the Connecticut Tax Structure

Abstract

The Connecticut tax structure contains glaring defects, especially in the corporate income tax, which have allowed it to hemorrhage to a point where, for some of the largest corporations in the state, it is essentially a voluntary tax. The corporate income tax must be revitalized in order to reduce the massive losses that have resulted from both an aged tax infrastructure and the Legislature’s failure to equip the Department of Revenue Services with a statutory regime to slow the erosion of the tax base. This Report discusses how and why Connecticut’s rickety tax structure is resulting in a loss of tax revenue by breaking the issue down into 5 sections. The Report first discusses the major defects with the corporate tax including a lack of combined reporting, the single-factor apportionment formula for manufacturing, and the failure to utilize a throwback rule. These weaknesses allow many of the largest corporations to pay an unfathomably low amount of tax. The Report then looks at the erosion of the sales tax base that has occurred as a result of internet and mail order sales, combined with the Connecticut Legislature’s passive stance. This had resulted, according to one report, in a revenue loss of $230 million to the state in 2003. Part Three examines and exposes the $4 billion of invisible backdoor spending that occurs through the tax system called tax expenditures, which although is detailed in a tax expenditure budget, is not integrated into the explicit spending budget or taken into account by the Legislature. Part Four argues that research shows cutting taxes is not the most effective way to increase economic growth. Lastly, this Report discusses whether there should be public, firm-specific disclosure of what each corporation pays in income tax, and concludes that this kind of transparency would bring accountability to the state system.