Archive for the ‘Connecticut’ Category

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2025 Tax Foundation’s State Tax Competitiveness: Some New Winners, But the Usual Losers

Thursday, October 31st, 2024

The Tax Foundation released its 2025 State Tax Competitiveness Index (formerly the Business Tax Climate Index).  While taxes aren’t everything in where you situate a business, they’re absolutely an important factor. If I have to pay an extra 10% in tax because of state taxation, I need to charge higher prices to make the same living.  (Another vital factor are regulations; regulations are a hidden tax on businesses because of the time it takes to comply.)  This year, the top ten state tax systems are:

1. Wyoming.
2. South Dakota.
3. Alaska.
4. Florida.
5. Montana.
6. New Hampshire.
7. Texas.
8. Tennessee.
9. North Dakota.
10. Indiana.

The bottom ten are familiar names in poor taxation systems:

41. Massachusetts.
42. Hawaii.
43. Vermont.
44. Minnesota.
45. Washington.
46. Maryland.
47. Connecticut.
48. District of Columbia.
48. California.
49. New Jersey.
50. New York.

This ends up being a bottom eleven as the District of Columbia (which isn’t a state but does have taxes) would tie with California if it were a separate state.

Let’s take a look at two states, and why the Tax Foundation ranks them where they are.  First, California (which is ranked 48th out of 50 states).

California combines high tax rates with an uncompetitive tax structure, yielding one of the worst rankings on the Index. The state has a great deal going for it, with its mild climate, excellent research universities, and the ongoing agglomeration effects of Silicon Valley, but a tax code that is uncompetitive and threatens to get worse is increasingly driving jobs to other states.

I couldn’t put it better.  California ranks 41st in corporate taxation (it’s ranking this good only because other states are so bad), 49th in individual tax, and 46th in sales tax.  Do note that this index doesn’t look at regulations.  I can’t speak to regulations in New York or New Jersey (I’m not familiar with them), but regulatory activity in California is a huge factor in driving businesses to neighboring states.  Let’s compare that with Florida, a state that many are relocating to.

Florida boasts no individual income tax, a competitive 5.5 percent corporate income tax, and a sales tax rate which—despite the lack of an individual income tax—is lower than those levied in many other southern states. Unlike many of its regional competitors, Florida does not tax capital stock, and its corporate income tax largely adheres to national norms, yielding a highly competitive overall tax code.

Florida ranks first in individual taxation, 16th in corporate taxes, and 14th in sales tax.  Is it any wonder why the Sunshine State looks so good to New Yorkers?

Again, taxes are not everything, but they matter.  Today, businesses can serve customers throughout the country.  Moving a business is never fun, but it’s far easier to do today than it was ten or twenty years ago.  States with a poor tax structure are losing businesses and will continue to do so.  What’s happening in California is real, and is one of the major reasons that Nevada (which ranks 17th in the State Tax Competitiveness Index) is gaining businesses.  As long as California continues down its current path, Nevada will continue to benefit.

Posted in Alaska, California, Connecticut, District of Columbia, Florida, Maryland, Montana, Nevada, New Jersey, New York, South Dakota, Wyoming | Comments Closed

Ignoring W-2Gs and $482,000 of Income Led to a Sub-Optimal Result

Monday, December 14th, 2020

Bluffing in poker can work quite well. However, if your opponent will always call, bluffing cannot work. One poker player learned that the IRS always call your bluffs (especially when they have evidence).

Guy Smith owns an interior construction business in Connecticut. He also enjoys playing poker, and had some success. With that success comes W-2Gs: They’re issued if you have a cash of $5,000 or more (net of the buy-in). Mr. Smith has had many, winning a poker tournament in Connecticut and finishing fifth in another in Florida.

Mr. Smith apparently didn’t tell his tax professional about those winnings. The IRS computer would, of course, send notices noting the discrepancies on the returns. Given the tournament winnings were more than $1 million, this is a big issue. Ignoring tax forms that are sent to the IRS has about a 0% chance of long-term success.

But like a bid informercial, that’s not all. Mr. Smith ignored $482,000 of income from his business (and didn’t tell his tax professional about that, either). Unfortunately for Mr. Smith, the IRS discovered this. With nearly $1.5 Million of unreported income and over $800,000 of unpaid federal income taxes, IRS criminal investigation was interested.

Mr. Smith pleaded guilty to one count of tax evasion last week; he is scheduled to be sentenced in March and faces up to five years at ClubFed. Given he has agreed to cooperate with the IRS and pay all outstanding taxes (and the penalties and interest), his actual sentence will likely be far less.

In just over two weeks I’ll be announcing this year’s winner of the “Tax Offender of the Year” award. To win this coveted award [1] it takes more than simply evading taxes. It has to be special; it really needs to be a Bozo-like action or actions. If you have any ‘deserving’ nominees, let me know.

[1] I’m not sure anyone really covets receiving this award, but given the actions of some of the previous winners it may be that some were actually trying to win the award.

Posted in Connecticut, Gambling, Tax Evasion | Comments Closed

IRS To New York, New Jersey, and California: We Weren’t Kidding

Tuesday, June 11th, 2019

Today the IRS issued rules and guidance on charitable contributions as a workaround to the new limits on state and local taxes. Unsurprisingly, the IRS said exactly what I thought they would: both substance over form and quid pro quo apply.

There’s a fundamental rule in tax: The substance of a transaction determines how it’s taxed, not what it’s labeled. Suppose I pay you to perform services for me, but I send you a Form 1099-INT (for interest income). What I pay you is service income, not interest income, no matter how it’s labeled. Consider state taxes. Suppose a state (say, New York) offers you the ability to contribute to the “Support New York Fund” instead of state taxes. Well, the substance is that you’re paying state taxes by contributing to that fund.

Another issue is “quid pro quo;” that’s Latin for ‘something for something.’ And if you get something for a charitable contribution, that portion isn’t charity. Consider a donation to some foundation for $50 and you receive a blanket worth $10; your charitable contribution (that you can take) is $40. This rule has been around for some time. It applies to these workarounds, too.

Put bluntly, the IRS isn’t amused with the workarounds. The Tax Code is law; until Congress changes it, federal deductions for state and local taxes are limited.

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Posted in California, Connecticut, Legislation, New Jersey, New York, Tax Preparation | Comments Closed

No Man Is an Island

Monday, March 11th, 2019

On Saturday a superb editorial appeared in the Providence Journal, “When Taxpayers Flee a State.” Here’s an excerpt:

Despite its name, Rhode Island is not an island unto itself. People are free to come and go, including business executives who create jobs and pay high taxes. That is why the state has to be careful that its tax policies do not drive away too many investors or taxpayers…

In high-tax Connecticut next door, billionaires are already escaping. As Chris Edwards of the libertarian Cato Institute notes (“Wealthy Taxpayers are Fleeing These States in Droves,” Daily Caller, Oct. 2), Connecticut in recent years “has lost stock trading entrepreneur Thomas Peterffy (worth $20 billion), executive C. Dean Metropoulos ($2 billion), and hedge fund managers Paul Tudor Jones ($4 billion) and Edward Lampert ($3 billion).”

People can, and will, relocate no matter how nice the climate. I loved living in Irvine, California, but California’s business climate drove me (and I’m not a billionaire) to low-tax, low-regulation Nevada. Rhode Island has lost $1.4 billion of income over the last ten years. The solution for both a small state (Rhode Island) and a large state (California) is identical: low tax rates over a broad swath, rather than very high tax rates in narrow areas. Of course, California now has high taxes over almost everything and a regulatory climate that is the worst in the country.

Posted in California, Connecticut, Nevada, Rhode Island | Comments Closed

We’re Not Gonna Take It

Thursday, August 23rd, 2018

The IRS issued proposed regulations today on charitable contributions as it relates to state and local tax credits. Here’s a hint to politicians in Connecticut, New Jersey, and New York. The IRS is telling you:

Here’s an excerpt from the IRS press release:

The proposed regulations issued today are designed to clarify the relationship between state and local tax credits and the federal tax rules for charitable contribution deductions. The proposed regulations are available in the Federal Register.

Under the proposed regulations, a taxpayer who makes payments or transfers property to an entity eligible to receive tax deductible contributions must reduce their charitable deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive.

For example, if a state grants a 70 percent state tax credit and the taxpayer pays $1,000 to an eligible entity, the taxpayer receives a $700 state tax credit. The taxpayer must reduce the $1,000 contribution by the $700 state tax credit, leaving an allowable contribution deduction of $300 on the taxpayer’s federal income tax return. The proposed regulations also apply to payments made by trusts or decedents’ estates in determining the amount of their contribution deduction.

There’s a de minimis exception for tax credits of no more than 15% of the payment amount.

This proposed regulation isn’t a surprise. Indeed, it’s hard to see under the Tax Code how tax credits as charitable contributions would succeed. As for the current lawsuit against the IRS regarding the new tax law, that has even less of a chance of success in my view. But it sounds good, so the lawsuit happened. The idea of a state like New York changing their tax laws to lower their tax rates apparently hasn’t occurred to New York politicians.

Posted in Connecticut, IRS, Legislation, New Jersey, New York | Comments Closed

We’re Not Gonna Take It…

Saturday, July 21st, 2018

You may have heard that earlier this week four states sued to stop parts of the new tax law from going into effect. The states–New York, New Jersey, Connecticut, and Maryland–don’t like the new $10,000 cap on deducting state and local taxes on federal tax returns. I believe this lawsuit is doomed; there’s no right in the Constitution to allow deducting of such taxes. This isn’t just my opinion; Ilya Somin at the Volokh Conspiracy notes what I think:

They argue not only that the 2017 cap is unconstitutional, but that the federal government has a general obligation to exempt “all or a significant portion of state and local taxes” from the federal income tax. The problem with this argument is simple: nothing in the text or original meaning of the Constitution supports it. To the contrary, the Sixteenth Amendment gives Congress a general power to power “to lay and collect taxes on incomes, from whatever source derived.” There is no mandated exemption for income used to pay state or local taxes. There is also no support for the states’ position in Supreme Court precedent, or in the American constitutional tradition more generally.

The humorous thing (to me) is that blue states normally lead in ‘progressiveness’ of their tax systems (that is, higher rates for individuals earning higher incomes). The cap on deductions will primarily hurt high income individuals. Of course, blue states don’t want out-migration of such high income individuals. Perhaps they might look to lower tax rates. Mr. Somin notes they could remove zoning restrictions. As for this lawsuit, it sounds nice to their constituents but it is almost certainly doomed.

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Posted in Connecticut, Legislation, Maryland, New Jersey, New York | Comments Closed

Cash & Carry Your Way to Tax Evasion

Sunday, September 27th, 2015

Kasia’s Bakery is a very successful bakery in New Britain, Connecticut. Its owner, Marian Kobryn, emigrated from Poland to the US to escape political oppression. He opened the bakery, and it’s been a great success.

The bakery operates on a cash-only basis. Mr. Kobryn was determined to lower his tax burden. Instead of making sure all expenses were noted on his tax returns and perhaps contributing to a SEP IRA, he decided to not deposit all of the cash into his business bank account. He knew about the currency transaction reporting (CTR) rules, so he made his cash deposits just under $10,000 and deposited them into several branches of his local bank.

While neither the Department of Justice report or the news report note what caused the initial IRS investigation, it’s a virtual certainty that it was his multiple deposits of cash. Mr. Kobryn apparently didn’t know about Suspicious Activity Reports (SARs). All financial institutions in the US are required to have programs to detect evasions of CTR rules. Additionally, the IRS investigates nearly all SARs while they don’t investigate many CTRs.

Mr. Kobryn’s evasion was of $730,000 of receipts, for a tax loss of $243,000. The penalties and interest totaled an additional $192,000. Mr. Kobryn was sentenced last week to time served (he is in poor health) and to make full restitution of the tax. He has already paid back all the tax and $50,000 of the penalties and interest. It’s a whole lot easier to simply pay the tax due in the first place…but that rarely occurs when you’re developing that perfect tax evasion scheme.

Posted in Connecticut, Tax Evasion | 1 Comment »

State Financial Health: Alaska, Dakotas on Top, Illinois, New Jersey, Massachusetts and Connecticut on the Bottom

Tuesday, July 7th, 2015

The Mercatus Center at George Mason University released a study today ranking the 50 states on their financial health. Here are the top six states:

1. Alaska (8.26)
2. North Dakota (2.97)
3. South Dakota (2.84)
4. Nebraska (2.75)
5. Florida (2.74)
6. Wyoming (2.67)

These six states have “Fiscal Condition Index” scores that are significantly higher than all the other states. Of course, where there’s good there’s also bad; here are the bottom seven states:

50. Illinois (-1.86)
49. New Jersey (-1.86)
48. Massachusetts (-1.84)
47. Connecticut (-1.83)
46. New York (-1.49)
45. Kentucky (-1.42)
44. California (-1.41)

Why are states ranked low?

High deficits and debt obligations in the forms of unfunded pensions and health care benefits continue to drive each state into fiscal peril. Each holds tens, if not hundreds, of billions of dollars in unfunded liabilities—constituting a significant risk to taxpayers in both the short and the long term.

Think unfunded pensions and you have one of the huge issues facing states. Illinois leads the way (which isn’t a good thing for the Land of Lincoln). There’s a reality: Whatever you make, spend less. Some states follow that creed; others give it lip service. California may have a “surplus,” but when you look at unfunded pensions things don’t look so good. Sooner or later, that bill will come due.

It’s an interesting analysis, and well worth your perusal.

Posted in Alaska, California, Connecticut, Illinois, Massachusetts, New Jersey, North Dakota, South Dakota | Comments Closed

Ledyard 3, Mashantucket Pequots 0

Sunday, August 11th, 2013

Back in mid-July the 2nd Circuit Court of Appeals ruled on an interesting case regarding tribal sovereignty at Indian casinos. The case pitted the country’s largest casino, Foxwoods, against the town of Ledyard and the State of Connecticut. The issue: Could Ledyard and Connecticut levy a personal property tax on non-tribal vendors who lease slot machines to Foxwoods? The original court decision held that various laws prevented Ledyard and Connecticut from imposing the tax on tribal vendors. However, the 2nd Circuit unanimously reversed the decision.

The main issue is whether or not the federal laws, such as the Indian Gaming Regulatory Act (IGRA) prohibits the tax. The court held that the interests of the state and town outweigh the federal interest.

The tax, imposed on non-Indian vendors, is likely to have a minimal effect on the Tribe’s economic development. While IGRA seeks to limit criminal activity at the casinos, nothing in Connecticut’s tax makes it likely that Michael Corleone will arrive to take over the Tribe’s operations.

Or, as the court put it,

The Town and State have more at stake than the Tribe. The economic effect of the tax on the Tribe is negligible; its economic value to the Town is not. The Tribe’s sovereign interest in being able to exercise sole taxing authority over possession of property is insufficient to outweigh the State’s interest in the uniform application of its generally-applicable tax, particularly where, as here, there is room for both State and Tribal taxation of the same activity.

Ledyard has begun to again receive tax payments. The other question is will the Pequots appeal to the Supreme Court or ask for an En Banc appeal to the entire 2nd Circuit? We’ll know the answer to that question soon.

Hat Tip: Victor Rocha

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Posted in Connecticut, Gambling | Comments Closed

Bad States for Gamblers

Monday, October 22nd, 2012

It’s been a while since I’ve listed out the bad states for gamblers. Here’s an updated list. Make sure you read the notes because while all of these states have tax systems that are problematic for gamblers, some impact amateurs while others impact professionals. Note that I do not cover the laws that impact gambling here (such as Washington State’s law that makes online gambling a Class C felony).

Connecticut [1]
Hawaii [2]
Illinois [1]
Indiana [1]
Massachusetts [1]
Michigan [1]
Minnesota [3]
Mississippi [4]
New York [5]
Ohio [6]
Washington [7]
West Virginia [1]
Wisconsin [1]

NOTES:

1. CT, IL, IN, MA, MI, WV, and WI do not allow gambling losses as an itemized deduction. These states’ income taxes are written so that taxpayers pay based (generally) on their federal Adjusted Gross Income (AGI). AGI includes gambling winnings but does not include gambling losses. Thus, a taxpayer who has (say) $100,000 of gambling winnings and $100,000 of gambling losses will owe state income tax on the phantom gambling winnings. (Michigan does exempt the first $300 of gambling winnings from state income tax.)

2. Hawaii has an excise tax (the General Excise and Use Tax) that’s thought of as a sales tax. It is, but it is also a tax on various professions. A professional gambler is subject to this 4% tax (an amateur gambler is not).

3. Minnesota’s state Alternative Minimum Tax (AMT) negatively impacts amateur gamblers. Because of the design of the Minnesota AMT, amateur gamblers with significant losses effectively cannot deduct those losses.

4. Mississippi only allows Mississippi gambling losses as an itemized deduction.

5. New York has a limitation on itemized deductions. If your AGI is over $500,000, you lose 50% of your itemized deductions (including gambling losses). You begin to lose itemized deductions at an AGI of $100,000.

6. Ohio currently does not allow gambling losses as an itemized deduction. However, effective January 1, 2013, gambling losses will be allowed as a deduction on state income tax returns. Unfortunately, those gambling losses will not be deductible on city or school district income tax returns, so Ohio will remain a bad state for amateur gamblers.

7. Washington state has no state income tax. However, the state does have a Business & Occupations Tax (B&O Tax). The B&O Tax has not been applied toward professional gamblers, but my reading of the law says that it could be at any time.

Posted in Connecticut, Gambling, Hawaii, Illinois, Indiana, Massachusetts, Michigan, Minnesota, Mississippi, New York, Ohio, Washington State, West Virginia, Wisconsin | 1 Comment »

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