Connecticut Gov. Dannel Malloy proposes removing exemptions from the state sales tax and lowering the tax rate, to bring in additional revenue and balance the state’s budget.
Revenues from Malloy’s tax plan, which includes increases in taxes on medical services, are projected to help close an expected $99.5 million general fund deficit for Fiscal Year 2015, which is projected to increase to $712 million the following year.
Removing Sales Tax Exemptions
Mercatus Center at George Mason University scholar and Professor of Economics Thomas Stratmann says Malloy’s reforms will likely have a positive impact on the state’s economy and the state’s budget.
“Wasteful adjustments in economic behavior and organizations due to exemptions are reduced,” he said. “At the same time, sales taxes are lower, and this helps consumers. Whether revenues increase depends on the responses of consumers. If they really buy much, much more, because sales taxes are lower, then revenues might increase.”
Stratmann says cutting sales taxes will help attract shoppers from other states.
“It will make the economy more competitive relative neighboring states,” he said. “Lowering sales taxes gives people from neighboring states an incentive to do their shopping in Gov. Malloy’s state.”
Cuts Here, Increases There
Suzanne Bates, policy director for the Yankee Institute for Public Policy, says Malloy deserves kudos for proposing to reform the state’s tax structure.
“Gov. Malloy deserves credit for slowing the rate of growth of state spending, but unfortunately spending continues to grow, requiring more and more taxes. The desire to cut the sales tax rate and broaden the base is a good one,” she said.
Bates notes Malloy’s tax plan does include tax increases, though.
“We wish the budget included a net tax cut or a revenue-neutral reform, rather than a tax increase,” she said. “Instead, we are cutting perhaps the most visible tax rate while raising some of the most obscure. That’s not good policy.
“The proposed budget includes a tax cut only if you look at the sales tax alone. In fact, Connecticut is faced with a tax increase, and one that will make it harder to get a job or affordable healthcare,” she explained.
Although she says she has no reason to doubt Malloy’s revenue projections, Bates says she hopes people will fact-check the governor’s predictions.
“I hope in a year someone asks about the estimate’s accuracy, a review is conducted, and improvements are made for the benefit of future budgets,” she said.
Jesse Hathaway ([email protected]) is managing editor of Budget & Tax News.