Businesses fret Malloy’s tax increases [HBJ]

February 23, 2015

Article as it appeared in the Hartford Business Journal

Facing a slower than expected economic recovery, Gov. Dannel P. Malloy is asking businesses to pay more in taxes and fees to help close billion-dollar budget deficits over the next two fiscal years.

Although the Democratic governor insists his two-year, $40 billion spending plan does not constitute a tax increase, the state’s chief business lobby is warning state lawmakers that if Malloy’s tax proposals are made law, it could have a cooling effect on the economy, hindering investment just as employers show signs of hiring more workers.

Connecticut added 26,700 jobs in 2014, the strongest growth since 1998.

“It really takes a shot at business confidence in the state,” said Joe Brennan, president and CEO of the Connecticut Business & Industry Association. “These tax increases discourage investment in the state … It could put the brakes on the recovery in Connecticut.”

Malloy’s budget, which increases spending by 3 percent in each of the next two fiscal years, proposes a myriad of tax changes, including a few that aim to provide relief to small businesses, but many others that will add to employer’s costs.

His plan includes extending indefinitely the surcharge on the corporation tax that was supposed to sunset in July; limiting employer’s use of credits and previous years’ operating losses to offset future tax obligations; and increasing business registration and trash disposal fees.

Even with Malloy’s proposal to eliminate the business entity tax, a $250 fee companies pay every other year, businesses will pay $459 million more in taxes and fees in each of the next two fiscal years under the governor’s budget.

No stability

Businesses often decry the lack of consistency in state policy, Brennan said, so the continuation of a tax surcharge, which was supposed to sunset, and the rewriting of tax credit rules will only add to their frustration.

Connecticut imposed a 20 percent surcharge on the 7.5 percent corporate tax rate four years ago, with Malloy originally promising to eliminate it in 2013. The surcharge ended up being extended and was again supposed to sunset this coming July.

Under Malloy’s budget, the surcharge will continue indefinitely, effectively raising Connecticut’s corporation tax from 7.5 percent to 9 percent, Brennan said.

“That would put us in the upper end of corporate tax rates in the nation,” Brennan said.

Malloy’s budget also reduces the amount of tax credits businesses can claim against their state tax liability from 70 percent to 35 percent. This reduction also applies to healthcare providers that pay the hospital tax. Businesses earn these credits for various activities including research & development and buying equipment.

“The credits aren’t going away,” Malloy said. “We are eliminating how much you can knock off your tax bill in a given year.”

The proposed budget does increase the amount of tax credits businesses can claim against their tax liability to 45 percent in fiscal 2017 and 60 percent thereafter, but given what has happened with the corporate tax surcharge, businesses aren’t optimistic that will happen, Brennan said.

Another tax liability change in Malloy’s budget is the previous years’ loss offset. Right now, businesses can use losses incurred any year in the previous 20 years to offset profits in the current year, in order to reduce their tax liability. Malloy proposes limiting the amount any business can claim to 50 percent of previous years’ losses.

“One of the biggest problems with this budget is the tax credit and net operating loss issue,” said State Senate Minority Leader Len Fasano (R-North Haven). “This is changing the rules in the middle of the game for companies that have already invested here and have planned out their taxes.”

Tough choices

While Malloy’s budget focuses on closing an estimated two-year, $2.7 billion deficit by cutting social services and raising the tax burden on businesses, he chose not to cut aid to municipal governments, keeping contributions flat at $4.9 billion for each of the next two fiscal years. Cutting that aid would force many cities and towns to raise property taxes to offset the losses, at a time when the property tax already is the largest tax burden in the state, Malloy said.

“Those increases would have occurred in communities that already have high tax rates,” Malloy said.

By not cutting local aid, Malloy also sets the stage for possible property tax reform, as Democratic leadership in the House and Senate have launched several initiatives aimed at regionalizing services and cutting local expenses.

Malloy’s budget does contain a $20 million cut in local aid based off of regionalization efficiencies proposed by House Speaker Brendan Sharkey (D-Hamden), which is a concern to local governments, said Kevin Maloney, spokesman for the Connecticut Conference of Municipalities.

In his budget, Malloy also proposed raising the fees for solid waste disposal from $1.50 to $2.50 per ton, which would have an impact on both municipalities and businesses.

“Although we do have some concerns, we are very appreciative of the fact that the governor did not cut state aid in the major categories,” Maloney said.

The solid waste disposal fee also would be expanded to include trash that is landfilled and shipped out of state. Currently, it is only collected against trash disposed at trash-to-energy facilities. The increase and expansion is expected to raise annual collections of the fee from $3.3 million to $8.6 million.

“It is important to level the playing field to make sure all the waste is treated the same,” said Dennis Schain, spokesman for the state Department of Energy & Environmental Protection. “It also would encourage recycling because no fee would be collected against recycled waste.”

Limited liability companies, limited liability partnerships, and limited partnerships will also pay $80 more each year to file their annual report with the Secretary of the State’s office, offsetting some of the benefits from repealing the business entity tax.

A few carrots

Malloy’s budget did contain some positives for businesses, specifically the continuation of economic development programs: $100 million over the next two years for Small Business Express; $50 million for the Manufacturing Innovation Fund; $20 million for brownfield revitalization; $200 million for the Manufacturing Assistance Act and general economic development; and $5 million for nonprofit and cultural economic development.

“I want Connecticut to have a first-class education system, a first-class transportation system, and a first-class toolbox to help businesses and the economy grow,” Malloy said. “The name of the game is jobs, and these programs help create jobs.”

The big ticket item in Malloy’s budget is a proposed 30-year, $110 billion transportation initiative called Let’s Go CT! that is designed to create a comprehensive intermodal system with highways, bridges, rail, buses, airports, and seaports. The initiative is kicked off by a five-year, $10 billion plan to finish the New Haven-Hartford-Springfield rail line and study projects like the I-84 viaduct in Hartford.

Malloy’s transportation proposal did not include a way to fund these projects, but he said he will discuss revenue possibilities with the legislature.

Adding tolls is a possibility.

Despite the lack of an exact funding proposal, Brennan said CBIA viewed Let’s Go CT! as a positive for the state’s business community, as the transportation infrastructure is badly in need of an overhaul.

“That initiative is driven — no pun intended — over the concerns about the economy,” Brennan said.