How do you raise tax revenue to balance the next state budget when no one wants to order a tax hike?
Majority Democrats want Connecticut to invite businesses to pay more taxes — voluntarily — next spring — in exchange for a contractually guaranteed tax break down the road, according to several sources within the House and Senate Democratic caucuses.
Whether this plan ever becomes law, though, remained very much in doubt Wednesday afternoon. That’s because Democratic legislators are not collaborating with Gov. Dannel P. Malloy on their plan for the 2016-17 fiscal year. And the governor’s office indicated Malloy would not sign any budget that was not negotiated with his administration.
“We believe this will help businesses plan for their taxes and give them the predictability that they want,” Senate President Pro Tem Martin M. Looney, D-New Haven, told The Mirror.
Neither Looney nor the co-chair of the legislature’s tax-writing Finance, Revenue and Bonding Committee, Sen. John Fonfara, D-Hartford, would discuss specifics of the budget Democratic leaders hope to pass before the legislative session ends on May 4.
But they said the concept of voluntary tax credit deferrals is on the table because it has the potential both to help Connecticut’s businesses and to bolster the state’s coffers next year.
According to legislative sources, the plan is centered on the state’s corporation tax, which is expected to raise almost $900 million for the state this fiscal year.
Connecticut allows businesses to claim various credits against the corporation tax. But companies cannot reduce their tax bill by more than 55 percent this year.
Until last year, the limit had been 70 percent, and many companies objected strongly last summer when the limit on credits was tightened.
Though full details were not available, sources said the Democratic budget plan would invite — but not require — corporations to waive some or all of their ability to use credits next spring.
Those companies that did so would be guaranteed — through a contract — that they could recoup those tax losses and more two years later.
Sources said the projected gain to the state next fiscal year would be about $60 million.
“It’s a voluntary program,” Fonfara said. “No business is going to enter into an agreement unless they think it is equal to or greater than the cost.”
‘Little more than borrowing’
When asked about the concept, the top Republicans on the finance committee said it appears to be little more than borrowing. The state would ask companies to give it some extra tax dollars next fiscal year in exchange for even larger payback in the near future.
“It’s an exceptionally poor idea,” said Sen. L. Scott Frantz of Greenwich. “The state will not be in a position to afford it a few years down the road, and I think most businesses understand that.”
According to the legislature’s nonpartisan Office of Fiscal Analysis, state finances — unless adjusted — are on pace to run $930 million in deficit in 2016-17. More importantly, shortfalls topping $2 billion are projected for the 2017-18 and 2018-19 fiscal years.
Additionally, analysts for the legislature and administration are tracking downward trends in state income and corporation tax receipts that haven’t been factored into those forecasts, meaning the deficit projections could worsen.
Three of the four major credit rating agencies on Wall Street have placed a “negative outlook” on Connecticut — an indication they are closely watching state finances and a possible prelude to a rating downgrade that could boost the state’s borrowing costs.
“This idea sets a very bad precedent,” Frantz added. “It’s unhealthy from all perspectives.”
Rep. Chris Davis of Enfield added that he’s skeptical businesses would want to participate, given the projected deficits coupled with major state tax hikes enacted in 2011 and 2015. “Any business should be fearful of any situation where we say ‘trust us,’” he said.
Fonfara questioned, though, whether this voluntary tax credit deferral is that different from past tax incentives the state has offered corporations — deals that have enjoyed bipartisan support.
“Did they (GOP legislators) feel that way about the UTC deal?” Fonfara asked, referring to $400 million in tax incentives Connecticut provided the East Hartford-based company in 2014. Its purpose was to trigger a major UTC investment in research, training and corporate facilities that employ about 15,000 people.
Looney added that the concept Democrats are developing “is one we have heard is broadly supported by the business community.”
Joseph F. Brennan, president and CEO of the Connecticut Business and Industry Association, said his group would wait to see all of the 2016-17 budget revisions before analyzing any components.
But Brennan did say, “We certainly appreciate the desire to be innovative” regarding business tax credits, adding that competing states have made their credits more lucrative in recent years and “Connecticut needs to be competitive.”
Brennan added that, regardless of any changes in the corporation tax system, no new budget would produce a healthier business climate without “significant, sustainable long-term spending reforms. We really need to see what they are going to do with that before we can judge anything else,” he said.