As lawmakers prepare to enter a new legislative session facing roughly $700 million in funding requests and calls for adjustments to the state’s fiscal guardrails, a report from the Office of Fiscal Analysis (OFA) shows the state foregoes a little more than $10 billion in tax revenue through tax credits and exemptions

According to the report the credits and exemptions under Connecticut’s tax code are meant to encourage certain activities, promote the public good, or provide relief to organizations working in the public interest. 

“A tax expenditure can be used to accomplish public policy goals. It may be enacted either to encourage certain activity or to limit the tax burden on certain taxpayers,” the OFA wrote. “A tax expenditure does not need to be re-enacted. Unless a sunset date is placed on a tax expenditure provision, it continues until amended or repealed.” 

Some of the largest tax exemptions are fairly simple and meant to benefit the general public: the state’s sales tax is not applied to groceries resulting in $584 million in foregone revenue; same for prescription medications, which accounts for another $600 million. 

Sales to government organizations are also exempted from sales tax, amounting to $1.2 billion, while sales taxes for nonprofits account for $155 million, meant to lower the burden on nonprofits.

Many of the tax credits and exemptions are quite small, but they add up. Many have no way to measure their impact or cost because there is no data and some of the more targeted credits are in place to benefit particular industries or groups. 

Connecticut’s various film tax credits have been the subject of debate over the years. In 2023; they added up to $103 million in credits for insurance companies and corporations.

The sales tax exemption for computer and data processing services amounts to $480 million, although the report says the taxpayers benefiting from this exemption is “indeterminate,” although the report indicates the exemption was meant to incentivize the industry and prevent costs of the tax from being passed down.

The purchase of motor vehicles and vessels by non-residents to use out of state accounted for $124 million in foregone sales tax revenue. That exemption, which requires the purchase to sign an affidavit, is meant to incentivize purchasers from other states buying vehicles in Connecticut and, according to the report, was used by 30,000 people.

Fuel distributors are exempted from the sales tax for purchasing the fuel they sell to the tune of $1.7 billion to keep those taxes from “cascading” down to the consumer in the form of higher gasoline prices.

Media advertising sales tax exemptions added up to $25 million; exemptions for licensed massage and electrologist services accounted for $19 million; and tax exemptions for amusement and recreation services were another $13 million. Rehabilitation and preservation of historic homes and structures amounted to $19 million in tax credits. A 50-cent cap on the taxation of cigars amounted to $11.6 million; state judges and attorneys and retired attorneys are exempt from a $565 occupational tax, which amounted to $8.2 million.

There is even an exemption for dues paid to lawn bowling clubs. It amounted to less than $100,000 for less than 245 people.

The report also highlighted foregone property tax revenue for both federal and state government buildings, properties owned by universities and colleges, hospitals, churches, nonprofits, and nursing homes for a total of $72.9 billion, as municipalities routinely look to the state for more education funding and support.

The largest property tax exemption was $26 billion for municipal properties, who clearly aren’t going to pay property taxes to themselves, followed by state properties that accounted for $12.4 billion. The state compensates municipalities for roughly 45 percent of lost property taxes through the Payment in Lieu of Taxes (PILOT) program, but the program has undercut municipalities in the past, particularly cities.

Private colleges also accounted for $6.8 billion in foregone property tax revenue. Institutions like Yale have come under scrutiny in the past for owning vast amounts of property in New Haven. According to the report, the state is supposed to reimburse municipalities 77 percent for private college property taxes.

The university cites its massive economic contribution to the city and indicates that it pays $5 million in taxes for non-academic properties and pledged $135 million, six-year commitment to the city. 

Hospital accounted for $7.9 billion in foregone property tax revenue, and religious organizations accounted for $5.4 billion.

Connecticut is already considered a high-tax, high cost of living state. Tax credits and exemptions are meant to reduce that burden on people and businesses, create conformity with federal tax law, create equity when a tax is deemed unfair, increase efficiency when the tax is less than the cost to collect and incentivize people and organizations to perform certain services, according to the report.

And while the state is currently facing a budget crunch despite higher revenues and surpluses, the OFA indicates that repealing some of these tax credits or exemptions might not bring in the same amount of foregone revenue. It would also amount, in effect, to a tax increase that could be passed down onto the general public.

“For certain tax expenditures, the FY 24 estimated revenue loss does not equate to the estimated FY 25 revenue gain from the repeal of the policy,” the report noted. “That is, the inclusion of a tax, would increase the overall cost to the individual or entity. The individual or entity may elect to purchase less of such a good or service if the overall cost increased. A lower consumption of the good or service results in a lower revenue gain.” 

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