The clock appeared to run out late Monday on a controversial measure hailed by advocates as the key to stopping corporate tax cheats and panned by critics as the surest way to drive businesses out of Connecticut.
The so-called “combined reporting” bill lay trapped on the Senate calendar, caught amidst a likely veto from Gov. M. Jodi Rell, insufficient Democratic support to override such action, and an angry Republican minority ready to filibuster any measure it opposes in the session’s final days.
“Unless it can come through the Senate with at least two-thirds (support), I’m not sure it would be worth the time it would take to get it through the House,” Rep. Cameron C. Staples, D-New Haven, co-chairman of the Finance, Revenue and Bonding Committee and a supporter of the measure, said Monday, adding he fears Republican opponents would spend “hours and hours trying to talk that bill to death.”
The regular legislative session ends at midnight on Wednesday.
The measure requires any company within a corporate group with at least one member subject to Connecticut taxes to determine its corporate tax bill based on the entire group’s net income.
Advocates contend that without combined reporting Connecticut is vulnerable to “aggressive” corporate planning by multi-state and international firms determined to hide their earnings in low-tax states. The legislature’s nonpartisan Office of Fiscal Analysis estimated state government would gain $88 million next fiscal year under a combined reporting system.
Democrats hold two-thirds majorities in both chambers, the margin needed to override any veto. They hold 114 out of 151 seats in the House, 13 more than are needed to reach an override total.
But there is no margin for error in the Senate, where Democrats hold exactly two-thirds of the seats, 24 out of 36. Sources said no more than 20 Democrats were prepared to vote for it Monday.
Sen. Robert Duff, D-Norwalk, said he isn’t prepared to back the bill at this point, noting there are strong conflicting arguments and adding he’s wary of taking any steps that might discourage job growth now.
“We all want everybody to pay their fair share,” Duff said, “but the question becomes: Is this do-able, will it bring tax revenue to the state without costing us jobs?”
Sen. Andrew McDonald, D-Stamford, said he is “leaning toward” voting for the bill, but remains unsure whether it would help the state’s economy. “It is not lost on me that 23 other states have adopted this,” he said.
The top Republican in the Senate, Minority Leader John McKinney of Fairfield, predicted Republicans would debate long and hard against the measure in both chambers. “If you’re a multi-state or an international corporation with offices here in Connecticut, this would provide enough punishment for you to decide to move out of state,” he said.
And Rell’s top development official, Department of Economic and Community Development Commissioner Joan McDonald testified that combined reporting “will discourage investment and make Connecticut a less attractive environment in which to do business. … Connecticut already ranks among the top states for the cost of health care, utilities and taxes. This is not the time to add any additional administrative burdens on Connecticut businesses.”
The proposal has been a topic of sharp debate through the regular legislative session.
Jeffrey Tebbs, a researcher for Connecticut Voices for Children, a New Haven-based public policy group, testified earlier this year before the finance committee that combined reporting would not just close a revenue loophole, but would level the corporate tax playing field. “At present, Connecticut businesses that lack related subsidiaries operating in other states cannot engage in the elaborate tax avoidance schemes available” to those with out-of-state affiliates.
“Allowing some of the most profitable corporations to exploit tax loopholes hurts families and small businesses,” added Lindsay Farrell, legislative director for the Working Families Party of Connecticut, a minor party founded by public- and private-sector labor groups. “Closing those loopholes would begin to fill our yawning budget gap without raising taxes on working people or slashing vital services. It would be a real shame if this measure failed because of the out-sized influence of huge corporations on our democracy.”
But opponents are equally passionate that the measure would stymie business growth, and ultimately drive down corporate tax revenues.
“It discourages business investment at a time when Connecticut needs it most,” said Connecticut Business and Industry Association vice president Bonnie Stewart, predicting it would distort companies’ tax bills, leading to increased tax preparation costs and litigation expenses. “Businesses like predictability and things that are easy to comply with. They are watching (the legislature) every day, and decisions about whether to locate here are affected by things like this.”
Stewart argued combined reporting has not produced major revenue hikes in other states where it has been enacted. She also contends any loopholes here were closed by a 2003 statute requiring multi-state companies to pay Connecticut taxes on certain intra-group payments. That law also allows the state to waive those taxes “if the corporation establishes by clear and convincing evidence that the adjustments are unreasonable.”