Budget applies sales tax to more services, goods

HARTFORD — Haircuts, laundry, legal services, veterinarian visits and parking are on the list. Even paying an accountant to file your taxes could now be subject to the state sales tax.

That’s because Gov. Ned Lamont proposed broad expansions of the sales tax in his budget proposal released Wednesday. The two-year budget does not increase the rate of the sales tax, but applies the levy to more things.

Textbooks, medicine, helmets and parking may be taxed, if the governor’s plan passes, as well as numerous consumer services. Lamont wants ramp up enforcement of tax collection on online sales, too.

“Our current sales tax is designed for a Sears Roebuck economy driven by over-the-counter sales,” Lamont said in his budget address. “Today we live in an Amazon economy which is driven by e-commerce, digital downloads, and consumer services.”

The sales tax expansion — forecast to bring in an extra $292 million in the first year of the budget and $500 million in the second year — was the major revenue change.

Other revenue changes included $30 million from a 10-cent tax on non-compostable plastic bags; $34 million from an eliminated income tax exemption related to pensions; 16 million from higher licensing fees for professional corporations; and $8 million from higher real estate fees for high-end houses. Some scheduled tax cuts were delayed, notably a surcharge on the corporate earnings tax.

But there were some significant tax cuts: a $200 property tax credit, based on income, to the elderly and people with dependents; an end to the business entity tax of $250 every two years; adjustments to the estate tax; and an end to a small gift tax, the only one by a state in the nation.

The sales tax changes are Lamont’s biggest way of increasing state revenue without raising the personal income tax on the rich — a promise he made on the campaign trail.

Plenty of people, on the left and the right, took issue with the changes. Lamont also wants to use tax policy to discourage behaviors like smoking, drinking alcohol and soda and using plastic bags. He proposed raising the age to buy tobacco to 21 and implementing a 75 percent wholesale tax on ecigarette liquids.

His budget included a 1.5 cent per ounce tax on drinks with added sugars and a five-cent bottle deposit on 50 milliliter liquor bottles and a 25 cent deposit on wine and liquor bottles.

Debating fairness

“The issue of revenues is going to be difficult, but I think it is going to be essential to do,” said Senate President Pro Tempore Martin Looney, D-New Haven.

Speaker of the House Joe Aresimowicz called the state’s current tax structure “flawed.”

“Is it far to pay [sales tax] for a pedicure but not a haircut? How is it that newspapers you don’t pay sales tax?” he asked. “There are a lot of things that make it inherently unfair.”

Republicans said the budget relies too much on revenue increases and not enough on cuts in spending. While Lamont’s plan may win support among some wealthy taxpayers, leftleaning Democrats view the sales tax as “regressive” and want to decrease reliance on it. State Rep. Josh Elliott, D-Hamden, co-founder of the House Progressive Caucus, spoke passionately in favor of raising the income tax on the wealthy in recent days.

“We are punishing the middle class in this state, and we are letting people who are ultra wealthy get by by paying nearly half of the rate of everyone else,” Elliott said. “We cannot simply be listening to anecdotal evidence of one or two ultrawealthy people who are leaving our state.”

House Minority Leader Themis Klarides, R-Derby, was also concerned about the effect of the governor’s tax changes on the middle class. “For the governor to say he is not raising the sales tax is slightly disingenuous because he is getting rid of exemptions,” she said. “There is nothing that hurts the middle class more than this budget proposal.”

Senate Republican Leader Len Fasano, R-North Haven, said there were good reasons why many of these sales tax expansions had not been implemented earlier. About a dozen Republican lawmakers brought Big Gulp sodas to the budget address to protest the tax on sodas.

Connecticut’s sales tax rate is now 6.35 percent. It applies to numerous goods, excluding groceries and medications. Last month, there was a report by the CT Mirror that Lamont was considering a sales tax on groceries, drawing immediate, fierce criticism.

Instead, Lamont has extended the sales tax to many professional services, barber shops and beauty salons, dry cleaning, coin operated laundry, parking, massage therapy and waste collection.

His budget would repeal the sales tax exemptions on non-prescription drugs, textbooks for college students, bike helmets, child car seat and newspapers. It would end the sales tax free week in August. Most of these changes would take effect on Jan. 1, 2020.

“The governor proposes to capture a growing segment of the economy,” said Melissa McCaw, secretary of the Office of Policy and Management. “Really the goal here is to level the playing field and have an equal tax treatment of both goods and services.”

Business-to-business transactions would be exempt, said McCaw.

Lamont also suggested raising the tax on digital downloads from 1 percent to 6 percent, increasing the tax on boats from 2.99 percent to the standard sales tax and upping the hotel occupancy tax from 15 to 17 percent.

Joe Brennan, president of the Connecticut Business Industry Association, said most of these sales taxes changes have been floated before. He doubted they would all survive legislators’ scrutiny.

The Connecticut Bar Association was among many groups that weighed in.

“A sales tax on legal services will place a barrier to reaching those in need, including those facing elder care, end-of-life issues, divorce and family separation, health and housing challenges and other issues,” said Jonathan Shapiro, president of the CBA and an attorney in Middletown and Stamford.

“The notion of taxing tax preparation services is fundamentally flawed as it poses what taxpayers will view as a penalty for filing one’s tax return in a complete, compliant, and accurate manner by engaging professional assistance,” said Bonnie Stewart, executive director of the Connecticut Society of Certified Public Accountants.