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Tax increases

 

Connecticut’s competitiveness at stake

If passed, SB-932 would instantly make Connecticut an undesirable place to do business. Nowadays, business investment is highly mobile, and companies have many options when it comes to where to expand or relocate operations. That’s especially true of headquarters companies that already have facilities in multiple states or countries. A critical factor in any company’s locational decisions is a state’s tax climate.

“States that provide a more hospitable tax environment are going to stimulate business activity and job creation,” says Lenore, “and they’ll be able to grow their economies by attracting companies from other states. There are examples daily of states enacting provisions to encourage businesses to relocate to their state as a means of growing beyond the current fiscal crisis. Connecticut risks being on the losing end of those initiatives if the tax burden on businesses becomes any heavier. We need business investment moving into the state, not out of it.”

As Connecticut lawmakers flirt with a protracted recession by making the state less conducive to economic growth, other states—New Jersey, Missouri, and Colorado, to name a few—are choosing to expand their way out of the recession by encouraging business development through new or enhanced financial incentives. In addition, none of our closest neighboring states—New York, Massachusetts, and Rhode Island—places a cap on the use of business tax credits, like Connecticut does. State law currently limits a company’s tax credits to 70% of its tax liability in one year. SB-932 would reduce that cap to 50% by 2010.

The need for predictability

To be sure, if SB-932 were to become law, it would dramatically increase the cost of doing business here and have a stultifying effect on business investment in the state. But even if few or none of the bill’s worst tax measures survives the legislative process, the mere fact that they were raised will have caused considerable damage to Connecticut’s business climate. Why? Such proposals create uncertainty about the state’s long-range tax policies, which prevents companies from planning for investment.

“Businesses generally plan for investment in cycles of seven to 10 years,” says Lenore. “So, when a firm considers whether to make a significant investment in the state, say, to move one of their operations here or develop a new product line, its decision-makers need to be reasonably certain that business conditions will remain stable over the long term—including the key parts of the competitive structure, such as tax credits and exemptions.

“When state government constantly threatens to remove or limit incentives for investment,” he says, “companies can’t factor them into their planning with any confidence. Once that much uncertainty is introduced to the system, you’ve effectively put the brakes on economic growth and job creation in the state.”

Economic recovery must be the top priority

Connecticut is in the midst of the worst recession in decades. “Many businesses that were going strong six months ago have seen things grind to a halt,” says Brennan. “Although legislators have a daunting task in trying to balance the state budget, they must make smart choices and not change our tax laws in ways that would drive investment and jobs out of Connecticut.”

If enacted, the Finance Committee’s tax proposals would have far-reaching implications. Further limiting business tax credits or expanding the sales tax to machinery and equipment will severely undermine the state’s viability as a place to do business for years to come. Once the national economy begins to recover, Connecticut will lose out to other, more forward-thinking states in the competition to attract new investment and jobs. As those states’ economies rev up, Connecticut’s will lag behind, as it did after the recession of the late 1980s and early 1990s, when the legislature attempted to tax its way out of an economic hole.

To reduce the need for tax increases, lawmakers must first reduce expenditures and make state government more efficient and responsive. With help from our members, CBIA will continue encouraging lawmakers to work with the governor toward that goal. Connecticut’s economic recovery must be the top priority; the state’s future depends on it.

Look to cbia.com in the days and weeks ahead for the latest information on the budget negotiations between Gov. Rell and the state legislature.


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