Tax credits under attack
As New York”™s governor proposed suspending payments on tax credits due some companies ”“ possibly having a chilling effect on economic development in the Empire State ”“ Connecticut lawmakers are finalizing plans for a review of the state”™s own hodgepodge of business tax credits.
As the finish line of the scheduled legislative session neared, the Connecticut General Assembly continued work on a proposed Revenue Accountability Commission that, among other goals, would examine tax credits corporations can use to offset their income tax liability.
The Connecticut Business and Industry Association said it supports such a review, provided it includes a competitive matrix assessing the impact of Connecticut business tax credits to those in other states.
“The impact assessment should include input from an advisory commission made up of Connecticut”™s industry sectors ”“ something that New York state has done,” said Bonnie Stewart, CBIA vice president of government affairs, in testimony on the bill earlier this year in Hartford.
In a bid to cut a $9.2 billion deficit in the New York state budget, Gov. David M. Paterson proposed in late April that the state delay paying tax credits due businesses, including Empire Zone tax credits on which the state relied for a decade to spur economic development in depressed areas.
Under Paterson”™s plan, the state would allow businesses to claim only half of the tax credit payments they could otherwise recoup through 2012, recovering the rest beginning in 2013.
In a study released in late April, New Haven-based Connecticut Voices for Children estimated that for every $100 in corporation business taxes projected for collection in the current fiscal year, some $54 was not collected due to claimed tax credits. In 2003, 13 corporations claimed tax credits equal to about one-quarter the total corporate tax revenue lost through tax credits.
“The state is long overdue for meaningful review of its revenue structure,” said Elizabeth Kelly, a Yale Law School student who advocates on behalf of Connecticut Voices for Children. “Connecticut has not comprehensively analyzed its tax structure since … 1990. In the ensuing two decades, hundreds of tax law changes have coalesced to create a fundamentally different state tax code. We simply don”™t know how these changes play together.”
In the Connecticut Voices for Children study, researchers Joe Hero, Orlando Rodriguez and Shelley Geballe estimated that the state lost $306 million in potential revenue to tax credits awarded corporations; the study made no effort to quantify the benefits to Connecticut in terms of increased spending by corporations and employees here as a result of tax credits.
The study determined that a dozen tax credits are available to corporations even if they have no Connecticut business tax liability to offset. Those credits are either transferable to other businesses with tax liability or can be sold back to the state.
The Connecticut and New York deliberations come against a backdrop of ongoing review of disparities in state and local tax codes nationally; Joseph Henchman, tax counsel for the Washington, D.C.-based Tax Foundation, says state tax policy amounts to “death by a thousand cuts” to the national economy.
“First, there”™s the state corporate income tax: it”™s a dying tax, killed off by thousands of credits, deductions, abatements and incentive packages,” Henchman said, testifying last month before a Congressional committee. “Corporations try to plan their way out of it, resulting in serious compliance and administrative costs compared to other revenue sources.”