What the Legislature’s Tax-Writing Committee Is Considering

04.01.2011
Issues & Policies

Much has been said, written and debated about how state tax policies could change in Connecticut this year. Now that the Finance Committee has finished its public hearings, the legislature’s tax-writing body is zeroing in on what it will actually recommend.

In addition to the $1.5 billion in tax increases included in Gov. Malloy’s budget proposal, several other tax proposals–some good, some bad—are of great interest to the business community. Here is a look at proposals the Finance Committee is considering and their potential impact Connecticut jobs, businesses and economy.

Positive measures restore fairness, clarity

One of the best ways to drive economic growth is to promote fair and clear tax policy. The Finance Committee heard comments on two bills that do just that. At the hearing CBIA expressed our support for those measures, SB 1213, An Act Concerning the Burden of Proof, and SB 1214, An Act Concerning Revisions to the Nonresident Contractor Bond Statute.

SB 1213 clarifies that the standard of proof in tax cases where there is no allegation of fraud is a “preponderance of the evidence.”

Lately, if a taxpayer has a good-faith disagreement with the state tax department, it must prove its case in court by “clear and convincing evidence” — a much higher standard than the “preponderance of the evidence” standard used in most civil cases.

The clear and convincing evidence standard usually applies only in cases involving civil fraud or other serious instances in which a very high degree of certainty is required. Using the preponderance of the evidence standard instead would strike an appropriate balance between the needs of the state and the rights of the taxpayer.

CBIA greatly appreciates the Finance Committee’s willingness to hear this measure and taxpayers desires to restore balance to the system.

Another positive measure, SB 1214, simplifies the tax policies and procedures associated with nonresident contractors. This is important because there is very little public awareness of the nonresident contractor laws, which creates a difficulty for property owners who might not have regular dealings with construction contracts.

Businesses appreciate the willingness of the Department of Revenue Services (DRS) and lawmakers to address this inadvertent and easily correctible concern in tax policy.

Unfortunately there are several negative proposals before the Finance Committee, too. They concern mandatory unitary reporting, a throwback rule and mandatory disclosure of private tax information.

Unitary reporting

Businesses and jobs thrive when a state’s tax policy is stable, predictable and consistent tax policy. But HB 6628 would cause a major upheaval in Connecticut’s corporate income tax structure by requiring an entirely new system–unitary, or combined, reporting.

Mandatory unitary reporting aims directly at the very businesses Connecticut needs to grow jobs and drive economic recovery–companies with multiple locations, such as manufacturing, R&D, and headquarters companies that employ tens of thousands of our residents.

It does this by requiring companies with multiple business units (for example, branches or subsidiaries) to include all income earned in other states in their Connecticut tax calculation. Connecticut currently uses a separate reporting system, in which different business units that are part of a larger group file their own state tax returns in the states where they operate.

Kevin Sullivan, DRS commissioner, told the committee that combined reporting was “problematic” and advocated caution while echoing the tone Gov. Dannel Malloy set on the topic during a recent news conference.

In their testimony before the Finance Committee, proponents of HB 6628 raised issues that don’t exist in Connecticut because they were fixed, some well over a decade ago. Lawmakers then rejected the unitary reporting system and instead adopted add-back provisions to address any perceived tax abuses and generate more revenues for the state.

The National Conference of State Legislatures (NCSL) is now encouraging other states to look at what Connecticut has already done. In its report Combined Reporting with the Corporate Income Tax (Nov. 2010), the NCSL says, “The tax planning opportunities that remain with combined reporting, together with the difficulty of determining the unitary group, may make combined reporting a less effective means of generating revenue than the adoption of an addback statute.”

There are many problems with mandatory unitary combined reporting, but the worst is the fact that it will significantly increase administrative burdens and uncertainty for the state and taxpayers without bringing a single added benefit.

Throwback setback

Of special concern to Connecticut’s exporters is a throwback rule contained in the Governor’s budget proposal. Under this rule, sales by Connecticut exporters into states that do not have a corporate income tax, where companies don’t have nexus or any sale to the federal government are added back into the company’s Connecticut tax calculations as though the activity was actually generated in Connecticut.

It is estimated that the throwback provision will cost these Connecticut-based exporters approximately $20 million a year. This tax will hit small and mid-sized Connecticut manufacturers the hardest.

Making matters worse, it’s a measure that encourages Connecticut exporters to locate their shipping and delivery operations and jobs out of state. This is because having those operations in a state such as New Jersey, which doesn’t have a throwback rule, means that the new tax liability mentioned above would not be incurred.

The consequences of measures like unitary reporting and the throwback rule is that they create an environment that discourages companies from locating operations in Connecticut. Policymakers need to adopt policies that encourage investment here which is why business executives and those they employ are urging lawmakers to understand the full impact of tax proposals and how they could convince companies that other, lower-tax-cost or less burdensome locations would be more favorable.

Tax disclosure

Businesses hope that the Finance Committee will reject any proposal that sends the message Connecticut is “closed for business.” Gov. Malloy’s budget director, Benjamin Barnes, says HB 6560 has that message written all over it.

HB 6560 would require public disclosure of Connecticut businesses’ proprietary tax and financial information that is strategic and competitive to the state’s private employers, casting a blow to their competitiveness and harming the state’s efforts to make Connecticut more business-friendly.

State policymakers and the public already have access to information regarding the amount of tax credits and investments made by businesses, along with other pertinent facts.

Identifying companies by name and disclosing their confidential tax information not only is unnecessary to determine which credits are being used, it would be extremely harmful to those businesses, their jobs, and Connecticut’s economy.

Making this information public will immediately make Connecticut companies’ operations and decisions open to the second-guessing from a wide range of interests. Business competitors might have the opportunity to review their chief rival’s tax information. Parties in negotiations might be able to review pertinent tax data from the opposing side. And special-interest groups would be able to use the information for political purposes.

No other state requires or permits the disclosure of company-specific data if a business is using tax credits, deductions or exemptions. It’s a “first” that Connecticut must avoid.

Many other tax measures are being considered, but these are some of the most significant. With Connecticut employers facing more than a $70 million hike in unemployment compensation taxes in calendar year 2011 alone, any additional tax increases or burdens on our economic engines must be looked at as a last resort.  

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

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