Risky Business: Tax Proposals No Cure All

As job losses in Connecticut soar past 100,000, advocates for higher state spending are calling for tax changes that have been rejected many times by the legislature over the years, won’t help state revenues, and actually would put more jobs in danger.

Business investment drives job growth and boosts municipal and state revenues.  But SB-485 would actually discourage investment and create a great deal of revenue uncertainty by imposing mandatory combined reporting, or unitary, taxation.

Requiring combined reporting is a bad idea for Connecticut’s economy and a risky proposal for state government. It depresses business investment because it illogically distorts a company’s net earnings taxed by the state.

Some proponents of unitary have displayed a serious lack of understanding about the various unitary tax laws in other states and its potential impact on Connecticut. Some say that compliance won’t be a problem because many companies do business in states that have a unitary tax scheme.

Clearly, that is inaccurate because the laws are in fact different from one state to the next. What’s more, even if there were two sets of statutes that were exactly the same, the interpretation of the laws would still vary from jurisdiction to jurisdiction.

Unitary proposals also deceptively promise state government more than they can deliver. Minnesota adopted combined reporting and the state looked forward to reaping higher revenues of $63 million (with a range of $23-103 million). Two years later, however, the Gopher State found no change in revenue as a result of mandatory combined reporting.

Then there is the case of California, the state most associated with combined reporting. The Golden State’s budget is worth anything but gold, with the state facing astronomical financial problems. And the state’s business climate is rapidly going south.

Clearly, combined reporting is not the cure-all its proponents profess it to be. What’s also clear is that combined reporting will make tax policy more complex and costlier–requiring more company personnel to prepare tax documents and more state personnel to audit them.

It will also lead to lengthy appeals and costly litigation. Regardless of which states currently have adopted mandatory unitary reporting, Connecticut definitely benefits by not having adopted it.

Because of the cost of administering and complying with unitary laws, states without such a law can benefit economically by avoiding it and gaining a competitive edge.

Another proposal, SB-478, would prevent corporations from showing by clear and convincing evidence that interest on royalty payments should not be added into the calculation of a corporation’s net income.

Interest on royalty payments that would otherwise be deductible must be added back into a corporation’s calculation of its net income, but state law provides an exception if a corporation can show by clear and convincing evidence that adding back the interest would be unreasonable.

The commissioner of Revenue Services would have to agree to the exception in writing.  Taking away the exception means that taxpayers would have no recourse other than litigation to guard against double taxation or some other unreasonable outcome.

A court could rule the entire statute unconstitutional, which would put a significant state revenue at risk. Connecticut’s exception is based on the one in the Massachusetts, and most every other state that has a royalty add-back includes the provision.

The current state statute is working well to avoid the improper use of royalty payments to avoid Connecticut tax and should not be changed.

CBIA urges the Finance Committee to reject both of these measures as harmful to Connecticut’s economy.

For more information, contact CBIA’s Bonnie Stewart at 860.244.1925 or bonnie.stewart@cbia.com.