State legislators passed a few positive bills for Connecticut businesses during the 2017 General Assembly session, but the projected $5 billion budget deficit may lead to higher taxes for businesses.

"It seems very hard to understand how [lawmakers] will get to meet these deficit numbers without additional revenue raisers," Louis Schatz, a partner at Shipman & Goodwin LLP, said at CBIA's Connecticut Tax Conference June 28.

Tax Commissioner Kevin Sullivan
DRS Commissioner Kevin Sullivan says Connecticut has a spending problem.

More than 100 people filled the main ballroom at the Hartford Marriott Farmington for the annual conference, which included breakout sessions covering tax matters and policies that affect businesses of all sizes.

Experts from CohnReznick, Shipman & Goodwin, PwC, KPMG LLP, and BlumShapiro & Co., spoke on topics including common tax risks, out-of-state tax obligations, and sales and use taxes for the manufacturing industry.

Department of Revenue Services Commissioner Kevin Sullivan also spoke, as did the agency's legal director, Marilee Clark.

'Everything Is in Play'

Lawmakers still haven't adopted a budget for the fiscal year that began July 1, and the earliest they will convene is July 18, leaving Governor Dannel Malloy to manage the new fiscal year using his executive powers.

This presents great uncertainty for Connecticut businesses and municipalities.

"What does that mean to your company's workforce and to you as a citizen?" asked CBIA Counsel Louise DiCocco, who specializes in tax issues.

"It means everything is in play."

DiCocco said the state's sales tax may increase from 6.35% to 6.99%—making it among the highest in the nation—and that lawmakers are discussing broadening the tax to cover more items and services.

Within 48 hours, House Democratic leaders confirmed her forecast by proposing to do just that.

DiCocco also said the possibility of lawmakers legalizing and taxing marijuana to raise revenues appears more likely as they grapple with the deficit.

"There's a lot going on and a lot not going on," she said.

No Revenue to Share

Sullivan said Connecticut has a spending problem.

"For 20 years under Republicans and Democrats, we've had a consistent pattern of spending outpacing economic growth and revenue growth," said Sullivan, a former state senator who accepted some of the blame.

He said it's important to remind legislators that revenue "does not grow because you pass a bill. Growth is because someone creates a job or sells a product or service, and we collect a tax on it."

Lawmakers can't agree on a two-year budget, and failed to concur on Governor Malloy's proposed three-month "mini budget" to run the state until they adopt a full package.

Sullivan said the state is not positioned to share as much revenue with municipalities because "you can't share what you don't have."

The lack of revenue could hurt businesses if property taxes rise, he said.

Revenues are shrinking because jobs restored after the recession are paying less, more people are retiring but earning less in retirement, and people who leave the state are usually replaced by someone earning less, he said.

"I wake up every morning worrying about who passed away or who left," he said.

Job-Killing Bills Quashed

Although CBIA and its allies helped pass legislation to streamline the workers compensation system and focus the state's technical high schools and community colleges on workforce development, what didn't happen in the session may be just as important as what did, DiCocco said.

CBIA helped defeat or amend legislation that would have placed costly mandates on workplace hiring, compensation, scheduling, and a mandatory paid family and medical leave.

These proposals would have added to the cost and complexity of creating jobs in Connecticut as the state's economy continues to struggle to recover from the 2000-2010 recession.

Schatz also cited new sourcing rules for pass-through entities requiring out-of-state companies doing business here to apportion more taxes for Connecticut.

"This is a good thing," he said.

New Regulatory Structure

His Shipman & Goodwin colleague, David Bigger, discussed a new regulatory structure for tax preparers and facilitators that could affect many of the tax professionals at the conference.

Several bills that await the governor's signature could help lower taxes and tax liability for Connecticut businesses, Schatz said.

But he warned that just because lawmakers pass a bill, Malloy may not sign it if it cuts into revenues.

He cited the angel investor tax credit lawmakers approved this year.

The original law allowed someone who invested in a Connecticut company in certain emerging tech areas to claim a portion of that investment against the state income tax.

For 20 years, we've had a consistent pattern of spending outpacing economic growth and revenue growth.
— DRS Commissioner Kevin Sullivan
The bill approved this year expands the credit to investments in all Connecticut companies.

"I think the likelihood of this getting adopted is slim to none because it takes away revenue," Schatz said.

Sullivan reiterated his call for Connecticut to examine the estimated $5.3 billion in tax loopholes and exemptions.

"There are $5.3 billion worth of loopholes in the revenue stream," he said.

"That means everybody, to some degree, is filling that hole. Some of those exemptions—such as for research and development—make sense, but a lot of them make no sense at all."

Sullivan said he wants his department to have more authority to pursue habitual non-filers and non-payers, find a way to levy the sales tax on e-commerce with point-of-sale collection, and end the business entity tax, which he called "the first slap in the face for any new business in Connecticut."

Stay Positive, Connecticut

Sullivan, who served as Connecticut's lieutenant governor and president pro-tem of the state Senate, gave equal criticism to Republicans for recently meeting with the Florida governor, who came here to lure businesses to his state, and Democrats for proposing a 19% surcharge on hedge funds.

"We're damned lucky to be one of two states in the nation that continues to be home to a very vital, very successful, and very tax-producing hedge fund industry," he said. "Why would anyone want that conversation?"

Sullivan also urged the business community to stay positive and not lament GE's departure to Boston or Aetna's recent decision to move its headquarters to New York.

The commissioner claimed state tax policy didn't force either move.

"How we talk about Connecticut and what we say makes a difference in how we feel about Connecticut and in how other people feel about Connecticut," he said.