2008 session in review:

Lawmakers grapple with business tax policy

(May 20, 2008) State tax policy has the ability to help — or hinder — economic development. Good tax policy can help employers create more jobs and compete in the global economy. Poor policy can burden employers with higher costs and make it harder for them to operate. With a business tax climate ranked 38th in the nation. (The Tax Foundation), Connecticut must do more to become a more attractive place for business investment.

With that in mind, here is a review of the top tax issues of the 2008 Connecticut General Assembly. The question is: Did state legislators’ actions on tax policy help Connecticut companies succeed or make it harder for them to survive?

Business entity tax
The state’s business entity tax was a hot topic during the 2008 session. For many, eliminating the tax would help restore fairness to Connecticut’s tax system. That’s because the $250 business entity tax is levied on businesses that already pay tax on their income through the state’s personal income tax — making the entity tax a “second” tax.

Two measures, SB-656 and SB-400, would have eliminated (fully or in part) the $250 business entity tax. Despite much support for the measures, concerns over the state’s fiscal status kept the Finance Committee from taking action on them.

Corporate taxes
The Finance Committee approved SB-658, which called for a study to explore changing Connecticut’s current corporate tax structure to either a unitary reporting or gross receipts system. Ultimately, the measure failed beyond the committee, and that was good news for Connecticut.

A unitary reporting system would discourage investment, have an uncertain impact on state revenues and employers’ taxes, and be complicated and costly to administer. A gross receipts system, widely acknowledged to violate principles of transparency, fairness, economic neutrality and competitiveness, would have been problematic as well.

Credits
Legislators considered many potential tax credits, including those supporting “angel” investors and employee wellness. The Finance Committee approved only SB-592, which created a tax credit for angel investors who provide seed capital to startups. This much-needed boost in the risky, early stage of a company’s development helps stimulate the kind of economic growth the state is seeking. As with many other measures, however, once the state’s declining fiscal status became clearer, this proposal failed to advance.

Property taxes
With property tax increases averaging nearly 7% a year for the last 10 years, all taxpayers are concerned about their next tax bill. Numerous property tax measures were discussed, but most would have only shifted, not reduced, the tax burden.

For example, SB-701 would have exempted from the property tax the first $100,000 of the assessed value of most single-parcel, owner-occupied residential real property. This “homestead exemption” would have placed a greater burden on business owners and potentially devastated manufacturers who are heavily invested in machinery and equipment.

HB-5028 would have addressed both the spending and the revenue pressures facing many municipalities. While nearly every state has, or is considering, some kind of a cap on property taxes or municipal spending, the legislature chose not to act on this proposal.

Unfortunately, lawmakers approved SB-26, which, in part, allows municipalities to keep certain assessed property values artificially low. It gives municipalities the option to modify certain assessed real property values based not on the actual value of the property in question, but on the average change in the value of each category of property within specific geographic areas of the town. This likely will shift a greater portion of the tax burden to commercial property owners.

Sales tax
Lawmakers considered a variety of measures that would have expanded the sales tax and hurt Connecticut’s economy. HB-5929 would have allowed municipalities to adopt local ordinances imposing sales, property or income taxes. HB-5844 would have imposed a new sales tax on certain delivery services that are not currently taxable. And HB-5940 would have increased the sales tax to 6.5% in order to provide sales tax revenue to regional councils of government. Fortunately, none of these measures was approved.

Taxpayers’ rights
One measure that could have improved Connecticut’s business tax climate was SB-702. It would have helped reverse the erosion of taxpayers’ administrative and judicial rights and protected their privacy. The proposal also would have clarified the standard of proof in most tax appeals as the appropriate and fair “preponderance of evidence” benchmark. Unanimously approved by the Finance Committee, Judiciary Committee and Senate, the measure failed only because the session ended and the the House ran out of time.

Where do we stand?
So, where does Connecticut stand on tax policy? While the state’s business tax climate remains 38th in the U.S., it’s encouraging that some positive measures this year received overwhelming support. On the other hand, the number of measures that would have harmed the economy is discouraging. CBIA encourages lawmakers to understand how important it is to have a business tax climate that promotes Connecticut businesses and help them create more jobs.

For more information, contact CBIA’s Bonnie Steswart at 860-244-1925 or bonnie.stewart@cbia.com.