Eliminating State’s Capital Base Tax Helps Startups, Entrepreneurs

The Connecticut Bioscience Growth Council spoke March 4 in favor of two bills that eliminate the capital base tax—a real obstacle for startup companies and entrepreneurs.

They are HB 5261, An Act Phasing Out the Capital Stock Tax, and HB 6459, An Act Concerning the Capital Base Tax.

Corporations are taxed by the state pursuant to a three-part test.

They pay the greater of:

• $250
• A levy on income, with the 7.5% statutory rate subject to a 20% surcharge, making the top Connecticut marginal corporate tax rate 9%
• A 0.31% tax on the capital base

Powerful Disincentive

The capital base tax works as a powerful disincentive to form startup enterprises in Connecticut and actually encourages entrepreneurial activity to occur outside our borders, Paul Pescatello, executive director of the Bioscience Growth Council, said in testimony submitted to legislature’s Finance, Revenue, and Bonding Committee.

Because the capital base tax is essentially a tax on corporate retained earnings, which includes savings of all kinds, including funds raised by new ventures from investors, it discourages the formation and growth of enterprises that require raising and holding large sums for research and development, Pescatello said.

Consider a start-up biotech just emerging from the academic labs of Yale, UConn or Jackson Labs.

The entrepreneur/founders face a daunting task: bringing a new medicine from laboratory concept to Food and Drug Administration approval takes about 12 years and $2.7 billion.

This means they must repeatedly raise great sums from venture investors.

During that decade or more of innovative research and development as the biotech is developing its new medicine, it will pay that $2.7 billion—as salary to its employees, to contract research organizations, laboratory suppliers, law firms, accounting firms, and for clinical trials to test over and over the medicine's safety and efficacy.

R&D Bills

To pay all those R&D bills, the start-up biotech will have at any given time during that decade of drug development tens of millions of investor dollars in its corporate bank account.

Bear in mind that, at this stage, the biotech has no product, no income, and only expenses. But Connecticut taxes the biotech on its bank account balance.

Since the biotech in this example has no income, it does not pay the 9% state income tax.
But it does have a large bank account balance—a capital base—to pay all its bills.

If the biotech has an average balance of $20 million—which is typical, with many companies having balances several times as large—it would owe Connecticut $62,000, equivalent to the starting salary of a biotech scientist.

This tax is also a thorn in the side of entrepreneurs.

Few other states have a capital base tax, and none drain startup coffers the way Connecticut does.

Economic Development Value

Connecticut has made significant investments in the life sciences to bring novel treatments and cures to patients, and for economic development the biopharma industry offers.

Among many measures of the sector's economic development value is the $55 billion biopharma spends annually on research and development.

This creates jobs with an average salary of $95,000 – 85% greater than the overall private sector average—and associated personal income tax revenue.

To attract biotech companies to Connecticut—to incentivize them to choose us over Boston-Cambridge, Roosevelt Island in New York, San Francisco, or San Diego—we need to eliminate the capital base tax, Pescatello told lawmakers.

It is unfair because it's levied not on income, but on money painstakingly raised and saved for R&D.
It's a shame that Connecticut policy would work to incentivize biotechs to set up operations or move elsewhere to avoid a tax that, while hugely consequential to them, is of little value to the state.

By removing the capital base tax we can help root cutting edge life sciences companies here and, in so doing, build a robust income tax base—corporate and personal—as our biotech companies' medicines reach pharmacy shelves.

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For more information, contact Connecticut Bioscience Growth Council executive director Paul Pescatello (860.244.1938) | @CTBio