Tax Credit Reversal Will Undermine Business Confidence
Special Session on Budget Dec. 19
Connecticut’s economy needs all the help it can get, but a proposal to plug the latest budget gap will undermine business confidence in the state as a place to grow and create jobs.
Despite the fact that businesses have planned, budgeted and acted based on the state’s current 70% tax credit cap, the proposal would reduce the cap and make the change retroactive to the beginning of this fiscal year.
Ironically, the change would penalize the very businesses that have chosen to increase their investments and stake their futures in Connecticut.
This fiscal year’s state budget is $415 million out of balance, a situation the legislature will address in a special session on Wednesday, Dec. 19. The plan to reduce the state’s corporate tax credit cap would raise an additional $12 million from Connecticut businesses.
There are no easy choices for solving the state’s fiscal problem, but an expanding economy would make the task easier. The tax credit cap proposal is poor state fiscal and economic policy because:
- Tax credits are purposefully implemented because they are proven tools to encourage economic growth.
- Credits are earned when Connecticut businesses investin such pro-growth, job-creating activities as research and development, fixed capital purchases, and expansion of data processing services, as well as hiring certain displaced or economically disadvantaged workers; developing or redeveloping certain urban areas and industrial sites; and investing in incumbent worker training and education.
- Businesses can’t take advantage of tax creditsunless they stay in the state and engage in whatever activity the credits are designed to encourage.
- Credits are an important catalystfor greater business activity and job creation, both of which result in millions of dollars in new state tax revenue every year.
- Tax credits have been a key componentof the state’s efforts to incent businesses to locate, stay, invest, and create jobs here—and they’ve worked.
Tax credits at work
When Connecticut used tax policy to stimulate the growth of industry clusters around R&D, good things happened—more R&D facilities were built and more jobs created—and the state gained additional revenues.
When Connecticut used tax policy to help ignite the state’s “FIRE” (financial insurance and real estate) cluster, more good things happened—companies and jobs stayed here, others moved in—and the state gained additional revenues.
And when state tax policy was used to help manufacturers, the state became more competitive for jobs, keeping many companies here and encouraging new, cutting-edge businesses to start.
Capping the amount of credits that can be claimed, or otherwise limiting their use will result in less (or no) activity in the areas policymakers had intended to bolster.
As the Governor’s Business Tax Policy Task Force said in its final report this fall, “Coherent and stable tax policy stimulates economic activity and strengthens our state and local tax base.”
In other words, predictability is the key factor in effective tax policy.
Activities that business tax credits are designed to incent require careful long-range planning that depends on a stable tax system.
Uncertainty over state tax policy, however, tends to freeze those plans and stifle economic activity in Connecticut.
And it sends the message to businesses looking to invest in the state that “investment today may be penalized tomorrow.” Ultimately, the tax credit proposal will destabilize state tax policy and undermine the business confidence the state is trying to strengthen.
For more information, contact CBIA’s Bonnie Stewart at 860.244.1925 or firstname.lastname@example.org.
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