Connecticut’s tax policy needs to project a clear set of guiding principles and be relevant to today’s economy.
That was the message Connecticut Department of Revenue Services Commissioner Kevin Sullivan delivered at the CBIA 2015 Connecticut Tax Conference.
The commissioner shared his outlook on the politics and policy of a legislative session that left his department little time to implement tax policy changes that were decided only two days before the July 1 start of the fiscal year.
Sullivan, who previously served as lieutenant governor and president pro tempore of the state Senate, acknowledged the inherent differences between the ways the state builds a budget and businesses build their strategic plans, saying policymakers need to realize that businesses need stable policies to guide their decisions and actions.
“At the Capitol, today’s decision is today’s decision, but businesses don’t work that way,” Sullivan said.
“They have to plan and anticipate. They have to build economic assumptions into their horizon. They need to know what the rules are going to be, at least in the near term. They need legislators to understand what happens when those rules change overnight, which is what happened this year.”
The commissioner noted that the $700 million in business tax increases included in the budget that narrowly passed by the legislature on June 3 could have a destabilizing effect on an economy just starting to show signs of recovery.
“I don’t think anyone expected this much, this fast, this way,” he said, adding that the reaction against those taxes from Connecticut businesses of all sizes and their employees was “appropriate,” but that it was “time for a time-out.”
Three days later, a special session of the legislature heeded Gov. Malloy’s call to scale back some of those tax increases, reducing the proposed hike by about $178 million.
Toward a more relevant tax system
Looking forward, Sullivan pointed out that Connecticut needs a tax system more relevant to a new economy—a service economy of partnerships, S corporations, and LLCs with a mobile workforce.
“The old world paradigm—based on a production economy, C-corps with a physical presence, tangible property, and geographic boundaries—is the world current tax law is written for,” he said.
“That’s not the world today.”
Sullivan agreed with the subsequently enacted delay in the imposition of combined unitary tax reporting until next year, adding that his department had hoped to begin discussions on the matter ahead of any legislative proposal.
“We had planned to convene a business group this summer to discuss moving forward on a unitary tax in the multilateral, multi-jurisdictional world in which we operate,” he said. “It was not our intention to go from A to Z overnight.”
Sullivan described the challenge DRS now faces in solving often conflicting provisions of hastily enacted tax policy. He pledged to work with CBIA and the business community to provide safe harbor for businesses acting in good faith where changes might go into effect suddenly.
Personal income tax also has business impact
The conference also featured breakout sessions on sales taxes specific to certain industries, as well as a plenary session led by the law offices of Shipman & Goodwin on issues including the extension of the corporation business tax surcharge, tax credit limitations, and changes to the personal income tax, estate and gift tax, and property tax laws.
Increasing the marginal tax rate for taxpayers whose income is above a certain threshold (over $500,000 for a married couple filing jointly, for example) is frequently—and often falsely—seen as a tax hike on the wealthy, said Ryan Leichsenring, associate at Shipman and Goodwin.
“This tax also applies to small businesses that are pass-through entities," he said. "We’re not just talking about wealthy residents; we’re talking about your LLCs and S-corps."
“And there will be ramifications to our economy if we start to see that flight down South,” he added, referring to Florida Governor Rick Scott’s bid to persuade Connecticut companies to relocate to a more business-friendly climate.
Alan Lieberman, partner at Shipman & Goodwin, added that much of the impact of Connecticut’s new tax package would be unknown until the legislature convened its special session, June 29-30.
“Because so much is still undecided, there’s just a huge asterisk hanging over my head.”