Connecticut’s business community is calling in its top guns to defend the state’s tax credit programs, which will likely be on the chopping block as lawmakers begin to debate Gov. Dannel P. Malloy’s budget plan that will have to close billion-dollar deficits for the next two fiscal years.
Last week, the tax chiefs from some of Connecticut’s blue chip companies — including United Technologies Corp., Aetna, Electric Boat, Boehringer Ingelheim, Chemtura Corp. and Lee Co. — were in Hartford urging policymakers not to reduce tax credit programs. Trimming the tax credits, they warned, would act as a tax increase on in-state companies and threaten future investment and employment in the state.
In an interview with the Hartford Business Journal, Malloy said he will not propose new tax increases on businesses in his two-year budget plan to be unveiled on Wednesday, but he is not ruling out eliminating or capping certain tax credit programs, especially those that get little use.
“We are in final decision mode on some of those programs, primarily the lesser used ones,” Malloy said. “We may curtail the application of some of those or at least limit the amount of offset to a tax obligation that can be taken in any given year. But honestly we haven’t made a final decision.”
Business tax credits are always a hot button issue with lawmakers, especially when the state is facing a budget deficit. Malloy will propose on Wednesday a two-year budget plan that will have to close projected deficits of $1.2 billion and $1.3 billion for the next two fiscal years.
And the state cedes significant revenue from some of its tax credit programs. According to Office of Fiscal Analysis (OFA) estimates, businesses will claim about $210 million in tax credits in fiscal 2013.
Businesses also had $2.2 billion worth of Connecticut tax credits sitting on their books at the end of 2010, which can’t be cashed in because of restrictions on how much of a tax offset companies can take in a given year, according to the Department of Revenue Services (DRS).
The amount of tax credits allowable generally can’t exceed 70 percent of the amount of tax due, or reduce the amount of tax to less than $250, according to DRS.
The state’s fixed capital tax credit, which is awarded for investments in new tangible personal property, is the most costly program, trimming state revenue $70 million in fiscal 2013, OFA estimates.
Bonnie Stewart, a lobbyist for the Connecticut Business & Industry Association, which hosted last week’s roundtable discussion on tax credit policy, said tax credits are seen as key incentives, particularly for some of the state’s larger companies, because they help offset Connecticut’s high costs for wages, health care benefits and energy.
Stewart said curtailing the use of credits for short-term revenue gains would eliminate a major source of long-term revenue for the state.
“Businesses would simply choose not to locate or expand here — or they would move to states with more favorable growth incentives,” Stewart said.
Among those making their pitch to preserve tax credits last week in Hartford was Harry Im, the state tax counsel for United Technologies Corp., one of Connecticut’s largest employers.
Im expressed the need for the state to preserve its heavily used research and development tax credits. He said the R&D credits have led to the creation of six key R&D centers in Connecticut that employ 8,000 engineers.
It was also a key factor that led UTC in 1999 to relocate 1,200 engineering jobs from Florida to Connecticut.
In fiscal 2013, Connecticut companies will cash in over $23.3 million in various research tax credits, OFA estimates.
Im said the R&D credits are important to key industry sectors in the state, like aerospace, pharmaceuticals and submarines, that have long product cycles, and need assurance that the credit, and its carry forward provision, will be in place for the long-run.
UTC subsidiary Pratt & Whitney’s PurePower Engine, for example, which is thought to be an economic game changer for the East Hartford company, took 20 years of research and experimentation and an investment of over $1 billion before it was ready to go into production.
“That is why we need to make sure the R&D credit is there for the long haul,” Im said.
Malloy’s economic development czar Catherine Smith also expressed the importance of maintaining the state’s most used tax credits, which she said have proven to be effective in growing the economy.
“Some of these tax credits have made the difference between companies investing in the state or not, so I think we want to be cautious about making dramatic changes to some of these programs that have benefitted the state enormously,” Smith said.
Tax credit programs, however, do have their critics. Some programs, like the state’s film tax credit, have received heavy criticism from groups like Connecticut Voices for Children, a left-leaning policy think tank.
In a 2011 report, Connecticut Voices argued that “some credits are ineffective, even damaging, while all credits erode the tax base, often in hard-to-predict ways.”
Meanwhile, Steve Bradstreet, the finance director of Aetna Information Services, made a plea for the state to preserve its electronic data processing (EDP) equipment tax credit, which offsets a company’s property tax liability on things like computers, printers, and bundled software.
In fiscal 2013, Connecticut companies will cash in $23 million in EDP credits, OFA estimates.
Bradstreet said it’s a particularly important tax credit for insurers that have major data centers in the state. Aetna, for example, invests about $95 million annually in EDP equipment, located primarily in its Middletown and Windsor data centers.
Bradstreet said there are 12 states including New York and New Jersey, that don’t impose property taxes on electronic data processing equipment so Connecticut’s tax credit allows the state to remain competitive in retaining data centers and the jobs that go along with them.
