Commission’s Bold Reforms Require Action; Tax Concerns Need Review

Issues & Policies

Lawmakers must act on the Commission on Fiscal Stability and Economic Growth’s recommendations for fixing the state’s competitiveness, growth, and affordability.
This requires greater analysis of some of the commission’s ideas—particularly a new business payroll tax—to determine the full impact on Connecticut’s competitiveness and economy, CBIA’s Brian Flaherty told a joint legislative hearing this week.

Fiscal commission report: Connecticut tax rates

Connecticut’s tax rates are among the highest in the country.

The commission, whose members include several leaders of Connecticut’s business community, delivered its recommendations to the legislature March 1 after three months of public hearings.
Flaherty noted that CBIA analyzed the report to address the impact on its diverse membership of thousands of companies, each of which will be impacted in a different way.
Lawmakers began considering the report at the March 23 public hearing before four legislative committees—Appropriations; Finance, Revenue, and Bonding; Commerce; and Planning and Development.
Flaherty told the hearing the commission delivered what lawmakers sought: “a bold, holistic solution to the challenges Connecticut faces—a shrinking economy, recurring budget deficits, and a loss of competitiveness in key areas.”
“Solving these challenges will take every sector and segment of Connecticut to shoulder the task of fixing our state,” he said.
“We fully expect that businesses will play an important role in stabilizing and growing Connecticut.”

Key Recommendations

Flaherty called many of the commission’s recommendations “a step in the right direction.”
These include:

  • Reducing the personal income tax
  • Eliminating the estate and gift tax
  • Reforming the legislative budget process
  • Bringing public sector health and retirement benefits in line with other states
  • Stabilizing our massive unfunded liabilities
  • Boosting efforts to educate more students in STEM fields

But he called for further analysis of other recommendations that may hurt the state’s competitiveness, including the proposed 0.8% payroll tax.
“Our member companies are concerned about the potential anti-competitive effects of rebalancing the tax burden,” Flaherty said.
“They are not convinced that it is a pro-growth shift in tax strategy.”
Businesses, he said, are concerned about “the size in the shift in taxes from individuals to businesses at a time when the economy is just beginning to turn around.”

Tax Impact

Connecticut continues to trail the region and most of the nation in recovering jobs lost in the 2008-2010 recession. But the state saw some positive job growth in 2017, including in its manufacturing sector.
That’s why the business community is concerned that new taxes could weaken the state’s economic and job growth.
The fiscal commission’s report cites an often-misinterpreted 2017 Council on State Taxation report comparing Connecticut’s total effective business tax rate with other states.
“COST, however, insists their study does not show Connecticut is a low-tax state for business—just that the state gets most of its revenue from other sources,” Flaherty said.

The net result must be that Connecticut businesses are more competitive.

He said that, taken alone, the effective business tax rate can make it appear that Connecticut has a low-tax business environment. COST acknowledges that:

  • Connecticut business tax revenues appear smaller when compared to individual income tax receipts that outweigh business collections.
  • Connecticut business tax revenues appear low compared to private sector gross state product because of the number of high-output industries such as insurance, financial services, and aerospace.
  • Connecticut has the highest growth rate in the nation for business property taxes.

Flaherty said the commission's recommendations do not account for the combined impact on business of the new payroll tax, the 40% share of the $1 billion increase in the sales tax companies will bear, and removing $750 million in unnamed tax exemptions.
"Taken together, a roughly $1 billion tax increase in a high tax state poses a daunting proposition for an economy just getting on its feet," he said.
"Our members tell us that a payroll tax could lead companies with both in-state and out-of-state locations to put employees in other facilities to avoid a payroll tax here."
And anything that prevents employers from investing in Connecticut will only make things worse, he said.
"But our members believe the fiscal commission's holistic solution can be refined and made more competitive," Flaherty told lawmakers.

Businesses 'Part of the Solution'

The fiscal commission likely did not have ample time to fully explore where state spending can be cut, Flaherty said.
"This legislature can and should build greater certainty into those areas," he said.
"Greater details will help define the unknown and gauge the impact of the proposed reforms.
"And an independent study to assess whether or not the tax changes will improve Connecticut's competitiveness must be part of the work going forward.
"Businesses expect to be a part of the solution, even if that entails higher taxes at some point. But the net result must be that Connecticut businesses are more competitive."
Flaherty urged lawmakers to maintain the commission's "sense of urgency" and the bipartisanship that led to the reforms enacted in the state budget last October.
Lastly, he pledged that CBIA and the business community will work "shoulder to shoulder" with lawmakers to strengthen Connecticut's affordability, vitality, and competitiveness.

For more information, contact CBIA's Brian Flaherty (860.244.1900) | @BrianFlahertyCT


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