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May 2009 — Vol. 87, No. 4

Tax increases in Senate Bill 932 would cost more jobs

Legislation could delay Connecticut’s economic recovery, make state less competitive

 

Connecticut’s prospects for economic recovery would be seriously jeopardized if the $38.2 billion tax and spending bills approved by the Finance and Appropriations committees become law. The two-year package, which was approved by the committees in April, relies on significant tax increases during a severe recession—a dangerous combination.

“During these tough economic times, 58,000 Connecticut workers have already lost their jobs, and businesses are doing all they can to survive and preserve jobs,” says John R. Rathgeber, CBIA president and CEO. “The budget and tax proposals, if adopted, would further harm Connecticut’s economy, delay our recovery, and cause additional job losses—particularly in the state’s key growth industries.”

The proposed tax hikes are the result of lawmakers paying too little attention to trimming the state budget, argues Joe Brennan, CBIA senior vice president of public policy. “The overall size of the tax increases says that the Appropriations Committee didn’t go nearly far enough in reducing state spending,” he says. “A $1.6 billion annual tax increase during a recession will only lead to more job losses. What’s more, if Connecticut had adopted the tax structure that’s contained in the Finance bill a few years ago, the state’s fiscal problems would be much worse today.”

Tax bill at a glance

Many of the provisions in the Finance Committee’s tax bill, SB-932, target Connecticut’s engine of economic recovery—its businesses. The proposals most inimical to job creation and business investment in the state would
• Repeal critical sales tax exemptions, including those for computer and data processing services and machinery, equipment, tools, and fuel used in the manufacturing, biotechnology, and fuel cell industries
• Reduce the limit on the total value of corporation tax credits allowed to any company in a year from 70% of its tax liability to 65% for the income year starting Jan. 1, 2009, and 50% for the income year starting Jan. 1, 2010
• Impose a 30% corporation tax surcharge for income years 2009–2011
• Increase the personal income tax on single filers earning $132,500 and above ($250,000 for joint filers) from a flat 5% to 6–7.95%. (Thousands of Connecticut small businesses pay their business taxes through the personal income tax.)

Impact

According to the state’s Office of Fiscal Analysis (OFA), during the first two years alone, the corporate surcharge and the elimination of existing sales tax exemptions would cost businesses approximately $475 million. (Read the OFA report at www.cbia.com/gov/bds/sb932taxstatutes.pdf.)

In addition, an economic analysis by the state Department of Economic and Community Development (DECD) projects that two components of the tax package alone—the 30% corporate surcharge and the repeal of sales tax exemptions on computer and data processing services—could cost 2,670 jobs a year over the next 10 years, resulting in a decline of $344 million per year in the state’s gross domestic product over the same period.

Restructuring the tax code: risky business

Indeed, much research has shown that increasing the tax burden on businesses and individuals generally has a negative impact on economic output as measured by GDP. That impact, of course, will be particularly acute during a recession.

State governments can minimize the damage by keeping any increases in the tax burden small, broad-based, and temporary. However, when policymakers make structural changes to the tax code in order to raise revenue or close budget gaps, they risk creating significant barriers to investment and job creation—and devastating a state’s economy in the process.

The structural changes to Connecticut’s tax system proposed by the Finance Committee—especially the limits on the use of tax credits and repeal of certain sales tax exemptions—are a case in point. Those changes target key growth industries in Connecticut, such as the bioscience and fuel cell industries, that make substantial research and development investments here. They also hit mainstays of Connecticut’s economy hard, such as manufacturers and the insurance and IT industries.

“Traditionally, Connecticut’s economy has relied heavily on headquarters companies and certain core industries—manufacturing, insurance and financial services, and knowledge-based industries, such as bioscience and pharmaceutical—to drive economic growth and jobs,” says Charles Lenore, partner, Day Pitney LLP, and chair of CBIA’s tax committee. “And by and large, state policymakers have structured the corporate tax system to provide a competitive environment for companies in those sectors to innovate and invest here. If those features of our tax code are weakened or eliminated, companies actually would be at a disadvantage in trying to conduct business in Connecticut compared to competitors in other states, since many states have created an environment favorable to those high-value businesses.”

Brennan agrees. “Rescinding the sales tax exemptions would make it virtually impossible for manufacturers to continue to invest here,” he says. “The reason is that most of their machinery and equipment is currently tax-exempt, and a single production machine can cost tens of millions of dollars. The materials they purchase to go into their products—the inputs—are also exempt. No other state that wants to keep manufacturing jobs taxes machinery and inputs. Taxing them, very simply, makes Connecticut companies uncompetitive and sends investment dollars elsewhere.”

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