The Connecticut sales tax
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The Connecticut sales tax is the most important single revenue producing measure in Connecticut's fiscal history. It has also proved to be one of the most controversial pieces of tax legislation adopted in Connecticut's history. My purpose has been to evaluate the sales tax as a measure designed to produce the needed additional revenue with the least amount of inequity to consumers and business in additional burdens, and with the least amount of administrative expense to the state. It is the tax that was chosen by the representatives of the people and may be considered to have a general public support from the beginning although the early support was by no means unanimous.
In Chapter 1, I present the background need for additional revenue in terms of the expanding expenditures of the state. The objects of these increasing expenditures were highways, charities, and education. Relief expenditures also held an important position in the 1930's. In the post war period capital outlay expenditures, neglected during the war, and rising prices made expenditures increase. These increases indicated revenue needs. The second part of the Chapter 1 is an attempt to indicate the need for additional revenue in terms of Connecticut general budget balance and general fund balance. Accounting concepts developed by the Bureau of the Census were used. It is felt that this approach helps to bring out more clearly the revenue inadequacies of the state. The last section of Chapter 1 deals with the Connecticut revenue system. The percentages that various taxes are of the total tax receipts are indicated for selected years showing the relative revenue importance of the various taxes. The analysis of the Connecticut revenue system indicates the need for broadening the revenue base. The results of this achievement through the sales tax are indicated.
Chapter 2 deals with the history of the Connecticut sales tax from its passage in May of 1947 to February of 1951. The history of the tax traces three threads of development. There is the legislative history which deals with the original passage of the sales tax bill, pressures for modification by various groups, the hearings before the Finance Committee preparatory to the special session of the legislature in 1948, the Saxon Report presented for consideration by the legislative finance committee, the special session with its resulting amendments, and the renewal of the sales tax vs. income tax controversy in the legislative session of 1949. This legislative history is a study in partisan politics and the basic theme is income vs. sales tax controversy. A second thread of historical development is the early community and public antagonism developing into final public acceptance. The third historical thread is that of the development of the administrative machinery for carrying out the act. Education of the public to final acceptance of an initially unpopular law may be seen in the campaign carried on by the state tax department and the press in bringing clarity to the sales tax act. It is indicative of the selling job a tax administrator has when new legislation is imposed. It has been my intent to present the arguments by the opposing sides in the controversy with as little injection of critical comment as possible. The hope is that enough of the logic or lack of logic to the various arguments is evident to present the true nature of the alternative and the extent of the correctness of the peoples' choice.
Chapter 3 presents a general comparison of the Connecticut two percent tax with the sales tax of the other sales tax states. A comparison is made as to type, basis, and rates. A second comparison deals with the exemptions of particular commodities under state sales taxes. A comparison of exemptions of sales to certain types of buyers and a comparison of exemptions of commodities subject to excises are also presented. Finally a comparison of exemptions of specific transactions is shown. The Connecticut tax is also compared with the taxes of certain selected states such as California, on which the Connecticut tax was modeled; Rhode Island, Maryland, Tennessee, and Florida which are with Connecticut the "new" sales tax states, and New York City which is within the same region. The major provisions of the Connecticut tax are explained, and attention is given to its scope, measure, rates, major exemptions, and revenue importance. A comparison of revenue returns under a one, two, and three percent rate is shown as well as the tax productivity of various types of retail business.
Chapter 4 describes the administrative machinery of the state sales tax and use tax devision. The cost of administration is compared under the one, two, and three percent rates. This was possible because the three rates were all in effect during the first four years of operation. The administrative problems of the use tax are discussed as well as the administrative problems connected with certain exemptions.
Chapter 5 deals with the economic aspects of the Connecticut sales tax. The problem of shifting and incidence as affected by the "separate charge" provision is discussed. Consideration is also given to aspects of shifting through cost structure of retail business. Burden and regressivity are the major subject of attention in the remainder of the chapter. A comparison is made of the regressivity evidenced when different sets of income expenditure data are used as a basis for applying the tax. Data from the following three studies, the 1941 "Study of Family Expenditure" by the National Resources Planning Board based on 1935-36 data on consumer purchases, the study on "Family Income and Expenditures in 1947" by Helen M. Humes, and the study of 1941 by the Bureau of Labor and Statistics on "Family Spending and Saving in Wartime," showed comparable results. The effect of exemptions on reducing the amount of regressivity was shown. By combining the percentage of income tax taken by the two percent tax and the gasoline and cigarette taxes and indication of the heightened regressivity which results from adding the sales tax to excises and other proportional taxes is evident.
Chapter 6 draws the following conclusions:
The Connecticut sales tax was a temporary measure designed to meet the need for increased revenue. It has met that need and achieved public acceptance in its four years of existence. Since revenue needs to continue to expand, the sales tax will become a permanent addition to the revenue system. It may be adjusted by and increase to three percent to meet the increasing demands for additional revenue and/or other sources will be tapped to provide the additional revenue. The future may possibly see an income tax added to the state tax system to provide the needed revenue.
The Connecticut sales tax represent a recent trend in sales tax development which does not recommend itself to ease of administration. This trend is illustrated by the increase in number of exemptions included under the Connecticut tax.
The exemptions which pose the greatest administrative problems and at the same time accomplish little in the way of added equity should be either modified or withdrawn. An extension of the tax to gasoline and cigarettes would be desirable. The exemption of children's clothing, which does little to reduce the regressivity and poses a major administrative problem, should be dropped. The withdrawal of the exemption on restaurant meals and on domestic fuel would accomplish much in the way of administrative simplicity and add noticeably to revenue receipts. The addition of tools and machinery sold to industrial and farm users to the exemption list would make the incidence clearer and more directly to the consumer. The exemption of food should be retained if the rate remains at two percent or moves upward. In the light of revenue needs and for the achievement of administrative simplicity, the exemptions should be reduced.
The incidence of the Connecticut sales tax is essentially on the consumer. This result is accomplished by complete shifting under the separate charge provision. The tax is regressive and the regressivity is modified somewhat by the exemptions. Though the regressivity is not particularly serious in itself, it adds to the burden of an already regressive state and local tax system. If the rate is increased to three percent the burden will noticeably increase, and the removal of exemptions on domestic fuel and restaurant meals perhaps should be foregone. Maintaining or reducing the rate with a reduction of exemptions would be preferable.
The burden on business is negligible at the present rate and generally diffused. An increase in rate would increase the competitive disadvantage of retailers competing with out-of-state firms.
The Connecticut sales tax has proven itself as an outstanding and fairly stable revenue producer. Recognizing the inequity in burden on the lower income groups, popular approval and ease of payment may well outweigh this disadvantage. Any increase in rate, however, should be made only after a complete and careful evaluation of possible alternative measures.
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Thesis (Ph.D.)--Boston University
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