Cutting business taxes in the discussion on state budget
There’s consensus among state officials that tax hikes won’t be considered to close the latest budget deficit. But what about tax cuts?
According to several sources close to the bipartisan talks that begin today, Gov. Dannel P. Malloy’s administration will suggest a modest business tax cut to improve Connecticut’s economic climate.
The tax cut would be seen as a continuation of steps taken in late June to assuage business anger over the new state budget.
Both Malloy spokesman Devon Puglia and Connecticut Business and Industry Association President Joseph F. Brennan declined to comment Friday. Brennan was meeting with state officials Friday at the Capitol.
But the governor made it clear earlier last week that he wanted the new budget talks to go beyond closing the $118 million hole the administration projects in this fiscal year’s general fund.
“It is our responsibility to maintain a balanced budget and create conditions that allow our families and businesses to grow,” Malloy told reporters last Monday when he issued his call for bipartisan budget talks. “…Together as a state we must remain focused on the long run, and on our long-term future.”
And while the Democratic governor emphasized the need for tough spending cuts to stabilize state finances, he also said any budget adjustments should be “about how we can grow our economy … and improve our business climate.”
The state’s business climate has gotten a black eye, particularly over the last five months.
Despite campaigning last fall on a pledge not to raise taxes, Malloy and Democratic legislative leaders crafted a new two-year budget that would have raised taxes by about $1.5 billion over the biennium while also postponing previously approved tax cuts worth close to $500 million.
After top executives at General Electric, Aetna and other major corporations threatened to leave the state, Malloy and lawmakers revised their budget deal.
By late June they had revised the package, rolling back $178 million, or about one-eighth of the tax increases.
Gone were increases in the sales tax rate on data processing and web development services. And a controversial shift in reporting rules within the corporation tax was postponed for one year.
But critics of the governor and his fellow Democrats in the legislature’s majority said the damage already had been done.
General Electric went public with its continuing search to relocate its headquarters outside of Connecticut, a process company officials have said they would resolve before January.
In a Quinnipiac University poll two weeks ago, 72 percent of all voters disapproved of Malloy’s handling of the budget. Half said they were “very concerned” at the prospect of General Electric moving its headquarters out of state in reaction to the state’s tax policies and unsettled fiscal climate.
Though full details on new tax cuts under consideration weren’t available Friday, eliminating the unitary reporting requirement within the corporation tax system – rather than just postponing it until the tax returns companies will file in the spring of 2017 – ultimately would save corporations about $24 million per year, according to the legislature’s nonpartisan Office of Fiscal Analysis.
Another new tax hike that drew particular criticism from the business community also is tied to the corporation tax.
Malloy and legislators imposed new limits on the operating losses companies can claim as a credit against their tax obligations. Reversing that decision could save companies $156 million this fiscal year and about $90 million annually after that.
But no tax cut is a political sure thing. For one thing, it has to be paid for, and that means cutting spending to offset the revenue loss.
Majority Democrats in the House of Representatives held a closed-door caucus Friday to prepare for the budget talks, and House Speaker J. Brendan Sharkey said afterward their focus is on restoring earlier spending cuts to hospitals and social services.
So would House Democrats support spending cuts – presumably somewhere else in the budget – to pay for a business tax cut?
“If there’s a holistic approach that responsibly offers some cuts to taxes but replaces it with cuts in spending to make up for that lost revenue, I’m open to any and all considerations at this time,” the speaker said.
But Sharkey quickly added that “we have to be careful about any kind of rollback in taxes. They have to be responsible, and they have to really further the economy.”
And there’s another challenge facing those who want to cut taxes: a big hole looming in Connecticut finances after the 2016 state elections.
The last report from nonpartisan analysts projected a $927 million deficit built into the fiscal year that begins July 1, 2017.
Since that estimate was issued last summer, the Malloy administration has downgraded expectations for income tax receipts this year by more than $200 million.
Analysts traditionally extend that revenue erosion into the future, which would push the post-election deficit beyond $1.1 billion.
Even were a new tax cut approved this fall, it remains unclear whether the state could afford to forfeit that revenue in the not-too-distant future.
Though Brennan didn’t comment Friday, the CBIA leader has said a renewed effort to lower taxes – if accompanied by a sincere push to control spending to ensure that the tax relief isn’t temporary – could bolster business confidence in Connecticut.
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