The state’s chief business lobby warned Friday that increasing the state sales tax–either through a rate hike or by canceling exemptions–would harm businesses and job growth even more than it would affect consumers.

Officials at the Connecticut Business and Industry Association also told Capitol reporters that before considering any new tax hikes on businesses, legislators and Gov.-elect Dan Malloy should remember that a state unemployment tax hike in the near future already appears all but inevitable.

“Businesses are still reticent to make the investments needed to grow jobs,” CBIA Senior Vice President Joseph F. Brennan said during an informal roundtable discussion at the association’s offices in Hartford. And much of that wariness, he added, involves uncertainty over how state officials will resolve the massive budget deficit looming over the upcoming fiscal year.

Deficit forecasts for 2011-12 range from $3.4 billion from outgoing Gov. M. Jodi Rell’s administration to $3.7 billion from the legislature’s nonpartisan Office of Fiscal Analysis. Both shortfall projections represent nearly one-fifth of the current year’s $19.01 billion budget.

Malloy said during the fall campaign that he would review the more than $3 billion worth of sales tax exemptions currently on the books in Connecticut to determine whether these breaks provide major benefits to consumers or help create jobs.

And some Democratic legislators have said that if Malloy is going to include tax hikes beyond higher income tax rates for the wealthy in the budget proposal he must submit in February, he should revisit Connecticut’s 6 percent sales tax rate.

Ben Barnes, Malloy’s choice for budget director, did not discuss any details of the budget plan under development during an interview this week, but he reaffirmed that the ability to promote job growth would be one of most crucial litmus tests for evaluating for evaluating all components, both expenditures and revenues.

Barnes also said, though, that the new administration believes strongly that “shared sacrifice” would be required by all constituencies in Connecticut to solve the fiscal crisis.

But Bonnie Stewart, CBIA’s tax policy specialist, said many legislators don’t realize nearly half of the $3.3 billion state government expects to receive this fiscal year will be paid by businesses rather than by individual consumers.

“I think the sales tax is something they (legislators) will definitely go after,” Stewart said.

Similarly, she added, many lawmakers also are unaware that many of the smallest businesses operate as sole proprietorships–the simplest form of organization–and therefore report all business earnings on the owner’s personal income tax return, rather than as corporate tax.

So regardless of the profit these proprietors actually make on their businesses, their reported gross business income could make them appear wealthier than they actually are. And an attempt to raise income taxes on wealthier households also could inadvertently target many modest small businesses, Stewart said.

And the state budget isn’t the only deficit-plagued fund that businesses are worried about, according to CBIA officials.

State government has relied on $500 million in interest-free federal loans to keep its unemployment compensation trust fund afloat since mid-October 2009, and legislators made no changes this year to the system for providing aid to jobless residents.

But while the interest waiver expires on Dec. 31, Connecticut continues to build debt in this area as unemployment remains high.

Most economists say Connecticut still hasn’t regained about 100,000 of the 113,000 jobs lost during the last recession. The state unemployment rate remains high at 9.1 percent, though it is below the national average of 9.8 percent.

CBIA assistant counsel Kia Murrell, a specialist in labor and workplace issues, said the state recently applied for another $210 million in loans to keep the trust fund solvent through February. And unless the General Assembly takes dramatic steps to end the borrowing, state government is on pace to run up nearly $1 billion in debt in this area by mid-2011, she said.

Even if state government doesn’t immediately begin the inevitable task of paying off the principal, unless Congress extends the interest waiver, Connecticut must begin payments on the interest next year.

Businesses pay two employment rates to generate the funds normally used to provide jobless benefits.

The first tax, which ranges from 0.5 to 5.4 percent, is levied against the first $15,000 in wages a business has paid to each of its workers over the prior three years. Typically called the “experience tax,” it applies higher rates to those companies that have laid off larger numbers of workers.

The state Department of Labor suggested earlier this year that increasing the taxable wage base from $15,000 to $20,000 would be necessary to make the fund solvent again.

Connecticut also can levy a “solvency tax” of as much as 1.4 percent – again on the first $15,000 of each worker’s wages – when extra revenue is needed.

The funds borrowed to date for unemployment benefits have been needed in addition to revenue from the solvency tax.

Most businesses expect they will face a new assessment to cover this debt in the near future, Murrell said, adding it could be the “perfect storm” to kill job growth if combined with other new taxes and costly mandates.

Keith has spent most of his 31 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut’s transportation and social services networks. He has been the state finances reporter at CT Mirror since it launched in 2010. Prior to joining CT Mirror Keith was State Capitol bureau chief for The Journal Inquirer of Manchester, a reporter for the Day of New London, and a former contributing writer to The New York Times. Keith is a graduate of and a former journalism instructor at the University of Connecticut.

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