In a bid to boost small businesses in Connecticut, lawmakers have proposed a $2,500 annual tax credit over the next three years for every worker a business hires.
The problem, however, is not every small business sees the measure having much impact.
More than 50 bills under consideration in the current short session of the Connecticut General Assembly address tax credits; the most intriguing are those that attempt to increase small-business access to such incentives.
Businesses with fewer than 100 employees qualify for all but three of the state”™s 33 tax credit programs, according to John Rappa, an analyst in the Connecticut Office of Legislative Research. Those credits target specific activities, however, such as building in a so-called enterprise zone; and Rappa noted that some credits require a business to spend a specified sum to claim a credit, a threshold that may be too high for some small businesses to meet.
Under a bill introduced by the General Assembly”™s Commerce Committee, businesses with fewer than 25 employees could claim a $2,500 tax credit for the simple act of hiring a full-time worker, with the incentive valid through the year 2012. If a business hired a worker in the second half of a calendar year, they could claim $1,250.
The bill would also limit tax credits to $10 million in any fiscal year, sufficient to cover small businesses hiring 4,000 workers at the full-rate of the credit.
The small business tax credit proposal comes even as Gov. M. Jodi Rell”™s administration recommends eliminating others that elicited scant interest, including one covering the hiring of workers laid off from other companies; and one that was passed for the benefit of financial institutions ”“ provided they construct a 900,000-square-foot facility.
“Most small businesses operate in (a limited liability company) or a partnership form ”“ a business, not a corporation,” said Richard Nicholson, Rell”™s nominee as commissioner of the Department of Revenue Services. “So while you could do a small jobs credit for corporations, this is probably not going to be very utilized. To get the effect on the economy that you wanted to do, I think (Rell) chose to do a tax credit that could be used on a personal income tax.”
Count Bill Ethier among those with small expectations for the small business tax credit proposal, in his position as CEO of the Home Builders Association of Connecticut.
“You know, it”™s a nice gesture; it”™s a nice thank you for businesses to hire employees,” Ethier said, testifying on the bill this month in Hartford. “But ”¦Â this bill is not going to incentivize anyone to hire a new employee. That”™s not why businesses hire employees. The only reason why businesses hire employees is because their current workload is too much for their current staff.”
The bill takes its inspiration from tax credits passed in 2006 for larger businesses hiring new workers ”“ an incentive few have taken, to the befuddlement of policymakers who cannot fathom why it has been passed up by so many companies.
By comparison, the state has elicited strong interest in the past from tax credit programs that target specific industries, such as the film production tax credit passed in 2006 or previous incentives for research. Before the emergence of the film tax credit ”“ by far the most popular tax credit in the state ”“ was one allowing companies to claim up to a 5 percent credit on purchases of equipment, with more than 2,300 companies claiming the credit in 2006 for a total of $77 million.
Â
“Most of our tax credits were designed around industry clusters and are intended to incentivize certain behavior in the state ”“ whether it be ”¦ research and development issues or putting locations in enterprise zones,” said Bonnie Stewart, vice president of public policy for the Connecticut Business and Industry Association. “And they work ”¦ The thing is, those tax credits are taken off of the corporate income tax, and the bulk of companies these days don”™t actually pay their business taxes through the corporate income tax; but instead they pay it through the personal income tax, something that”™s not realized by many people. And the way this measure is written, it will allow those pass-through entities. So anybody that”™s a partnership or a limited liability corporation or an S-corporation would be able to take advantage of this tax credit.”
Â
Joe Hero, a staffer with Connecticut Voices for Children, said that past studies generally have shown that job-creation tax credits are economically inefficient.
“Multiple analyses of jobs creation tax credit programs have found that 70 percent or more of the credits granted employers would be awarded for jobs that would have been created without the credit,” Hero said.
Any such program in Connecticut should reward employers for net job creation, Hero said. The initial legislation under consideration would allow a company to cut a worker a month after filling a job opening, while still pocketing the tax credit, he said. Similar laws in Maryland and Massachusetts require employers to maintain an expanded payroll for a year to claim the credit.
Stewart said CBIA would oppose any such limitation in Connecticut, saying business owners would be loathe to paint themselves into a legal corner when it comes to headcount commitments.
“Three years ago I would have told you that”™s fair; based on the conversations we”™ve had with our members over the last two years, I”™d say that it”™s probably not going to have the intended outcome,” Stewart said. “There are a lot of companies now that are ”“ you know, have gone through furloughs and work share and you name it. And they”™re trying to find whatever way they can to be the most efficient and effective. And sometimes that means that if ”¦ somebody leaves and the job needs to be replaced, they”™re looking around to see where that job should go ”¦ Connecticut doesn”™t always end up a winner, and that”™s not because we”™re not a great place to live or anything, but we all know we”™ve got very high costs here in Connecticut. And that”™s why things like tax credits can be extremely helpful.”
