Corporate Tax

Might Connecticut Abolish Its Company Earnings Tax?

Connecticut’s economic troubles since the 2008 recession are well known. The state has seen some of the lowest employment and income gains in the country at a time when the national economy was thriving.

Then of course there was COVID and the forced closings of small businesses, restaurants, hotels, and entertainment venues across the state.

Between 2008 and 2020, Connecticut raised and spent hundreds of millions, if not billions, on forgivable loans, grants, and tax credits to create jobs, attract companies from other states, or prevent companies from leaving, but the impact has been small on the state’s economy .

Now, a new study argues that there is an easier, cheaper way to fuel Connecticut’s economy and attract companies from other states to relocate: the abolition of corporate taxes.

According to Growing from Zero, a new strategy paper from the Yankee Institute, “Connecticut should pursue transformative policy change that benefits new and existing businesses alike – and sends a strong signal that we are open to business. There is no better destination than corporate income tax (CBT), which collects 7.5 percent of corporate income from the state. “

But eliminating any source of income in a state in perpetual financial crisis – not including this year when the Connecticut budget deficit was fixed with federal COVID aid – may seem like an impossibility.

Connecticut’s dependency on corporate taxes has grown from 15 percent of the budget in 1990 to 5 percent in 2020 over the past three decades, and has earned an average of $ 834 million per year for the past five years.

However, authors Ken Girardin, Policy Director of the Yankee Institute, and Daniel Gressel, Ph.D, argue that with the rise in corporate taxes in New York and New Jersey, the abolition of corporate taxes in Connecticut will attract more businesses and people and the work of the state could promote the population and the economy.

They also call for the end of Connecticut’s practice of offering companies tax-backed loans, grants, and tax credits to add or retain jobs, the linchpin of Connecticut’s economic development plan for the past decade.

“Government accounting practices do not provide reliable information about the total cost of economic development programs, but partial government accounting indicates managed government ‘investments’ of $ 1.4 billion – which likely would have resulted in more private sector jobs had funds been available instead would be used to reduce or eliminate CBT, ”the report said.

“The reduction in CBT rates in the late 1990s created jobs at a lower cost per job than many of the existing government subsidy programs to create jobs,” the report said.

Governor Dannel Malloy’s First Five Plus program, a state subsidy program for large corporations, spent $ 255 million to create 3,842 net new jobs, according to the study.

The study also highlighted the loss of some key corporate headquarters to other states, such as United Technologies and General Electric, but also the decreased presence of some other large corporate units, and found that Pfizer now has half the workforce in Connecticut as of 2009.

Connecticut is currently home to 14 Fortune 500 companies, up from 22 in 1990.

However, corporate tax abolition would face a massive battle in Connecticut, where lawmakers are largely led by lawmakers pushing to raise taxes on corporations and again expanding a corporate tax surcharge that ranges from $ 50 million to $ 80 million each Year should go under in 2021.

Corporate tax affects not only large international corporations, but smaller businesses as well, which are less likely to benefit from Connecticut’s complicated tax credit loopholes and end up paying a higher effective rate than their larger counterparts.

Connecticut already issues tax credits and loopholes for certain industries, from film and television production to research and development to aviation fuel. Companies can also take business losses forward to reduce their future tax liability.

By 2018, Connecticut companies had “accumulated nearly $ 2.9 billion in loans for future use – more than three times what Connecticut collects annually from the CBT,” the report said.

In essence, Connecticut businesses do what any business, family, or individual does – try to reduce their tax liability – and the intricate mechanisms behind it can do more harm than good to Connecticut’s economic future.

As of this writing, Connecticut is still missing over ninety thousand jobs as of February 2020, and economists have projected that Connecticut could take a while to normalize.

But “getting back to normal” means a stagnant economy for Connecticut and the loss of residents and businesses to other states while trying to use taxpayers’ money to stimulate the economy.

“Most of Connecticut’s efforts to stimulate the economy have come in the form of grants, loans and other direct aid to preferred businesses,” the report said. “State legislators can and should fund the repeal of CBT by abolishing not only these, but also the categorical VAT breaks, income tax credits and other provisions in tax law that benefit certain industries.”

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