The commissioner of Revenue Services says taxpayers are not meeting their full tax liability, and as much as $2 billion in state tax revenue isn’t being collected.
The nonpayment or partial payment of tax liability by individuals and businesses, called the “tax gap,” is the difference between what the state is owed and what it receives. And it has consequences not just for the state, but also for taxpayers, DRS Commissioner Mark Boughton said.
“Sixty percent of the people are carrying the burden for 100% of the residents,” Boughton pointed out.
Connecticut Voices for Children, a nonprofit tax advocacy firm in New Haven, found in an independent analysis that the state’s tax gap could be around $2.6 billion and likely most benefits the wealthy. A report from the U.S. Department of the Treasury agrees and says the tax gap nationally is as much as 3% of the U.S. gross domestic product, which was around $23 trillion at the time.
Boughton disagrees that the gap all comes from the highest earners. “There are a lot of small businesses that are wrapped into [the tax gap],” he said. “Those are the businesses that we want to encourage, help them grow. We want to be their partner, we don’t want to put them out of business.”
Boughton has a plan to close the gap. The DRS is building the Data Analytics Initiative, which will analyze taxpayer data to better understand who’s not paying and why.
“I think it’s going to tell us where the places are to look,” Boughton said, “because right now, literally, you’re pulling a needle out of a haystack.”
The department is asking for $750,000 this fiscal year and $1.13 million for the next to hire a team that will use machine learning and data visualization to present recommendations for taxpayer education and enforcement.
The revenue gain is estimated at $40 million annually beginning next fiscal year.
The bigger picture
The initiative comes as the rainy day fund is at its legal maximum and the state surplus is projected to reach $1.76 billion for fiscal year 2022.
Gov. Ned Lamont has proposed several election-year tax benefits, including an increase in the property tax credit, a decrease in the car tax, tax incentives for businesses to pay off some of their employees’ student loans, and elimination of taxes on retirees’ incomes.
The legislature is considering other tax cuts, including a state-level child tax credit, and an expanded state earned income tax credit. Connecticut Voices for Children recommended funding the state child tax credit by enforcing the tax gap. The organization estimates that the credit would cost the state $300 million, well below the projected tax gap of around $2 billion.
Boughton believes the Lamont administration cuts won’t have to be rolled back, and he’s worried.
“I am concerned about the legislature going too far,” said Boughton. “I understand they want to do more, but I can’t emphasize enough, we have just gotten our sea legs under us in our budget. So I think it’s important we take it slow.”
