Study panel fills its plate with major tax questions

Should Connecticut ease up on taxing gifts and inheritances?

How about placing a cap on the total amount of tax credits doled out to businesses?

And what can the state learn from the companies that receive tax incentives without scaring them over the borders?

These topped a list of questions — not recommendations — a study panel launched by Gov. Dannel P. Malloy unveiled Tuesday as it closes in on an Oct. 1 deadline.

The Business Tax Task Force, which has spent the past few months surveying Connecticut businesses, public officials and others, also reported its findings about how these groups see the business tax climate.

The task force, which will resume work on its recommendations on Sept. 6, is not crafting recommendations for the governor or legislature to implement in 2013, said Department of Revenue Services Commissioner Kevin Sullivan, who co-chairs the task force.

Though some proposals likely could be put in play next year, the final report will be a blueprint, a series of related changes designed to be implemented over the next six years.

Connecticut currently imposes a 7.2 percent tax on estates and gifts valued at over $2 million, and the latter is imposed on the donor, not on the recipient.

That is “a major stick in the eye” in terms of making Connecticut’s tax system attractive, Sullivan said.

Similarly, the task force also decided to spend the next six weeks studying whether to recommend capping at $10 million the maximum tax any estate could owe.

Location, location

“Think about perception and think about how people decide where they want to be,” Sullivan said, adding that these decisions also can influence where people decide to locate their businesses.

Several concepts the task force elected to focus on over its final six weeks are related to broadening economic markets that stretch not just across state lines, but national boundaries.

Connecticut may need to change how it defines “doing business” to ensure out-of-state companies that conduct operations here don’t have an edge over firms located within the Nutmeg State, task force members said.

An annual online registration fee, such as $125, might be imposed on all companies that want to do business with Connecticut companies or consumers, regardless of whether those firms are located here.

But the panel also questioned, were that to be recommended, whether Connecticut would need to impose its $250 biennial fee on many businesses that have no corporate income tax liability.

Similarly, the state also might streamline its corporation tax, ending the surcharges it has used in recent years for state budget-balancing purposes, and allowing at least smaller businesses to file their taxes electronically.

State Comptroller Kevin Lembo, who also serves on the task force, released several proposals Monday he wants the panel to consider recommending.

Several of these proposals would improve transparency and expand oversight of the business tax system and particularly the credits awarded to companies, including:

  • Creating an online, searchable database;
  • Encouraging cities and towns to regularly produce public reports on property-tax abatements;
  • Producing a yearly tax incidence analysis report estimating not necessarily who remits taxes to the state, but which entities actually pay those taxes. “Knowing who pays which taxes and how much they pay is essential to making informed business tax policy decisions.”;
  • Producing a yearly tax rate report that would calculate the effective tax rate imposed on businesses after credits, exemptions and other incentives are factored into the equation;
  • And reporting yearly on the status of each firm in the state’s business assistance portfolio.

Catherine Smith, commissioner of the Department of Economic and Community Development and the panel’s other co-chair, said that her agency is particularly focused on tracking the jobs created by companies that receive state aid. “That is our bellwether, in a sense,” she said.

But Lembo said that besides the argument that accountability and transparency should be linked to any business-assistance program, another reason for compiling more data about these companies is that it could help Connecticut compare its economic development programs with those in other states, and likely improve upon them.

“There’s lots out there I think would be instructive for us,” he said.

But Julie McNeal, the Connecticut Society of Certified Public Accountants’ representative on the task force, said too much analysis of tax credits could have a dangerous effect on companies’ confidence.

Businesses crave simplicity and certainty in state tax policy, she said, adding that if companies fear these tax credits might be debated annually in political arenas, they might be afraid to use them to expand. “What you don’t want is them thinking any credit that you have today may not be there tomorrow,” she said.

What happens to tax credits that companies are entitled to, but can’t claim because they don’t earn enough, or they don’t owe enough taxes to use the full benefit?

Connecticut could begin to sunset these credits, or assign them to new uses, though Sullivan said any such recommendation could draw considerable political opposition.

“Behind every tax credit is somebody who put them on the books,” Sullivan said. “And behind them is somebody who asked them to.”

Stranded credits

The state currently has over $2.5 billion in so-called “stranded” tax credits effectively sitting unused and unusable on its books.

The Connecticut Center for Economic Analysis, the University of Connecticut’s economic think-tank, has long criticized state officials for not mobilizing these credits to drive growth, redirecting them to companies prepared to add jobs now.

Sullivan said most businesses generally see their tax burden as a “modest factor” when deciding whether to locate or expand in Connecticut. But when other factors, such as energy costs, available skilled labor and transportation networks tend to be equal between competing states, “at that point, the tax issue tends to be the tie-breaker.”

Businesses also recommended that Connecticut avoid the “race to the bottom” and limit its reliance on one-time tax incentives offered to specific companies, Sullivan said. These can be valuable economic development tools on specific occasions, he added, but the state generally is better served when its tax system distributes relief across a broader range of businesses.