Connecticut legislative proposal on calculation of interest on refunds: March 13, 2002.

On March 13, 2002, Tax Executives Institute submitted the following comments on legislation to change the calculation of interest on corporate tax refunds to leaders of the Connecticut legislature. The comments on H.B. No. 5666 (An Act Concerning Certain Administrative Procedures of the Department of Revenue Services) was directed to Senator Martin M. Looney, chair of the Senate Committee on Finance, Revenue and Bonding, and Representative Anne B. McDonald, chair of the House Committee on Finance, Revenue and Bonding. The submission, which took the form of a letter from TEI President Robert J. Ashby, was prepared under the aegis of the Institute's State and Local Tax Committee, whose chair is Bruce J. Reid of Microsoft Corporation, with significant assistance from the Connecticut Valley Chapter, whose president is E. David Edwards of Ensign-Bickford Industries, Inc.

As president of Tax Executives Institute, I am writing to express TEI's opposition to pending legislation that would deny Connecticut taxpayers fair and appropriate interest on tax refunds paid by the State. H.B. No. 5666, an Act Concerning Certain Administrative Procedures of the Department of Revenue Services, is scheduled for consideration this week.

Tax Executives Institute is the preeminent association of business tax executives in North America. Our approximately 5,300 members represent 2,800 of the leading corporations through 53 chapters in the United States, Canada, and Europe, including our Connecticut Valley Chapter, whose 60 members all work for major local enterprises. (A substantial number of our non-Connecticut members work for companies that have sales or operations within the State and that are significant taxpayers.)

TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to ensuring a tax system that works -- one that is fair, administrable, and that taxpayers can comply with in a cost-efficient manner.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with a myriad of tax law provisions at the federal, state, and local levels relating to the operation and taxation of business enterprises. That is why plain dealing and consistent treatment at all levels of tax administration are vitally important to our members. Both of these principles are jeopardized by H.B. 5666, which would limit the running of interest on corporate tax overpayments to the date of the amended return or claim, rather than the date of the original return or overpayment, while permitting the State to charge interest on underpayments from the due date of the original return.

H.B. 5666 purports "to clarify when interest is paid on certain corporation business tax refunds" among other changes to enhance tax administration in the State. Lurking within the bill, however, is a significant shortening of the applicable interest period on amended returns claiming an overpayment. Clarification of the tax law is a laudable objective, but not when its real effect is to obscure a significant and adverse change affecting corporate taxpayers. That fundamental change would undermine the fairness of Connecticut's tax system.

The interest rate provisions of the tax law should be designed to accomplish one thing: to recompense the parties -- both the State and the taxpayer -- for the time value of money. TEI opposes the enactment of different periods for the computation of interest on overpayments and underpayments because it violates this principle as well as the American sense of fair play. We believe this proposal reflects a proclivity to use interest provisions as a penalty or disguised tax to raise revenue, neither of which represents sound tax policy or administration. Moreover, the differing treatment is out of sync with both the federal rules and the prevailing interest provisions in the majority of States. Failure to compute interest in a consistent manner diminishes the value of the taxpayer's remedy of recovering monies to which it is legally entitled. Tilting the period for which interest will be paid in favor of the State creates a perception that the deck is stacked against taxpayers, encourages taxpayer cynicism, and fosters an attitude that "gaming" the tax system is perfectly acceptable -- "just look at how the State plays." Consequently, public confidence in the fairness of the system is eroded. Further, such a change would adversely affect the State's revenue stream as taxpayers become more cautious with their payments to reduce the chance of a non-interest bearing overpayment.

Interest provisions should not be manipulated simply to collect additional revenues or even to encourage or discourage specific taxpayer behavior. Most fundamentally, the manner in which interest is calculated should not change depending on which side of the transaction the State is on. The computation period for interest should be equal and applied evenhandedly to both the State and taxpayers. Tax Executives Institute opposes the provision of H.B. 5666 that would thwart consistent payment of interest on overpayments and underpayments and further undermine the integrity of the tax system.

If you should have any questions about TEI's position, or if there is any way that TEI can be of further assistance, please do not hesitate to contact Gregory S. Matson, of the Institute's legal staff, at 202.638.5601.