“unfair tax system.”
That proposal is one of many included in “The Case and Policy Options for Improving Connecticut’s FY 2024 – FY 2025 Budget,” a 66-page report published on Thursday by the Whitney Avenue-based research and advocacy nonprofit Connecticut Voices for Children. The report was written by the group’s research and policy director, Patrick O’Brien.
Thursday’s report comes a few weeks before the state legislature is set to begin a new full session in Hartford in early January. It lays out in detail which policies the reform group plans to push for in the months ahead.
“The key finding is that pre-tax income inequality and racial and ethnic income gaps decreased in Connecticut last year, but the state still has the third highest level of pre-tax income inequality during a period of historic income inequality in the U.S. as a whole, and the state also still has substantial pre-tax racial and ethnic income gaps that tend to result in higher levels of income inequality for families of color,” the report’s introduction reads.
Another key finding, the report’s introduction states, “is that Connecticut’s tax system is unfair because it disproportionately burdens low- and middle-income families, especially families of color, and thereby increases post-tax income inequality and racial and ethnic income gaps, offsetting in part the recent, important reduction in pre-tax income inequality and racial and ethnic income gaps.”
Click here to read the report in full, and here to read the report’s executive summary.
How to make the system more fair?
The report includes a whole bunch of recommendations, including reforming the so-called volatility cap, boosting funding for the state Department of Revenue Services, and increasing Connecticut’s top-income tax rates.
Another recommendation laid out in detail in the report is “eliminating or reducing six of the state’s high cost, high growth tax expenditure programs, one of which is for film production.” According to the state’s own “broader economic impact analysis,” the report states, “Connecticut loses an average of nearly $80 million a year from its film production tax expenditure program alone, which more than offsets the average total gain from the other major business assistance tax credit programs.”
The report states that Connecticut’s film production tax expenditure program consists of two key expenditures. First, state law makes a tax credit as high as 30 percent for companies that spend over $1 million making movies or tv shows or commercials in Connecticut. “Companies can apply this tax credit to the sales tax, corporation tax, and insurance premiums tax, or they can sell it to other eligible companies.”
Second, state law makes available a tax credit equal to 20 percent of a project’s costs of $3 million and above. “Companies can apply this tax credit to the corporation tax and insurance premiums tax, or they can sell it to other eligible companies.”
“Altogether, the film production tax expenditure program costs $93 million in fiscal year 2023, up from $34.4 million in 2013, a growth of 170 percent; the benefits for the individual credits range from a low of fewer than 10 taxpayers to a high of up to 75 taxpayers; and the rationale for the program is incentive and expediency.”
The positive effects of these tax credits on Connecticut’s economy are dubious, the report continues.
“For important background information, following its own analysis published in its 2018 and 2019 annual reports, the DECD did not provide an analysis of the film production program in its 2020 and 2021 annual reports — the latest to date — and instead ‘retained a consulting firm specializing in film, television and digital media industry-specific economic impact studies to perform an evaluation of the agency’s film incentive programs.’ ” And according to the consultant-written report, in 2020, “the related state and local tax receipts only total about $79 million compared to $133 million that the state issued in the tax credit, resulting in a net loss of about $54 million.”
So. What should the state legislature do about this film tax credit?
One option: “Eliminate the six selected high cost, high growth tax expenditure programs. This includes the tax expenditures for computer and data processing services; motor vehicles and vessels purchased by non-residents to use out of state; film production; aircraft repair and manufacturing; renovation and repair for residential real property; and the $2.5 million cap on unitary liability.”
Another option: “Reduce the six selected high cost, high growth tax expenditure programs.” To accomplish that, “Cap the total film production credit at some amount below $82 million a year (the estimated current annual cost), and/or cap the total film production infrastructure credit at some amount below $11 million a year (the estimated current annual cost).”