While Gov. M. Jodi Rell’s proposed state budget seeks to close the state’s gaping deficit with spending cuts rather than new taxes, Democratic lawmakers have introduced a series of tax bills that would hit businesses hard.
The bills would eliminate virtually all business tax credits and exemptions to the state’s sales tax. The proposals would:
• Extend sales taxes to professional, insurance, occupational and person services.
• Suspend all corporate tax credits for two years, including tax credits for R&D and breaks for businesses considering relocation to or from Connecticut.
• Eliminate certain sales tax exemptions, including on machinery and equipment.
“We are not going to be able to balance the budget by just cutting expenses,” said state Sen. Andrew McDonald (D-Stamford). “We are still going to have to look at the revenue side and see what can be increased.”
State Sen. Gary D. LeBeau (D-East Hartford), chairman of the Commerce Committee and a member of the Finance Committee, where the bills were introduced, said it’s the Legislature’s duty to put every possible solution on the table.
“This is the beginning of a sifting process to come up with smart moves to [balance the budget],” said LeBeau, who said he doesn’t necessarily endorse all the proposals.
Opponents of the tax legislation say the bills would dramatically increase the cost of doing business in Connecticut and stunt economic recovery in the state.
“I think the Legislature is headed down the wrong path,” said Bonnie Stewart, a lobbyist with the Connecticut Business and Industry Association. “Most businesses are barely getting by as it is. If these proposals are adopted, it will make companies think twice about coming [to the state]. These bills are job killers.”
In a speech Feb. 4, Rell, a Republican, stressed the severity of the budget crisis but avoided using new taxes to help balance her proposed $38.4 billion two-year budget.
Deficit forecasts from the legislative office of fiscal analysis have ranged as high as $1.35 billion for the current fiscal year and $8.7 billion for the next two fiscal years.
McDonald said it is inevitable that the state will need to raise more revenue to balance the budget. He urged the business community to come to the table with suggestions.
Businesses Need ‘Action Plan’
“Businesses need to have an action plan in place with things they can agree to,” he said.
But state Sen. Toni Boucher (R-Wilton) said new taxes won’t solve the crisis.
“I think it sends a terrible message to our businesses and residents,” Boucher said. “We can’t afford new taxes that will drive us further in the hole.”
Under proposed legislation, manufacturers would face a new tax on the sales of machinery and equipment, and they would lose research and development tax credits.
“The state is slowly killing the manufacturing industry to a point that if they adopt these additional sales taxes, we would seriously consider leaving,” said Richard Stathers, a co-owner of True Position Manufacturing in South Windsor.
His company started as a two-man crew in 1999. The staff has grown to seven, and sales have climbed to $1.4 million. He was forced to lay off one employee in recent months.
Without the machinery sales tax exemption, which has been in place for the last decade, his company would have two fewer machines and two fewer employees, he added.
A spokesman for United Technologies Corp., the largest corporation based in Hartford, said the bill would tax essentially everything that is purchased or sold in the state.
“This will inevitably lead to multiple taxation, as the value of goods and services are repeatedly taxed at all levels of the supply chain,” Gary Minor, UTC’s director of state and local government affairs, said in written testimony to lawmakers.
Meanwhile, professional services, including accounting and legal work, would face a 5 percent sales tax. Five states currently tax accounting services.
Undermining Competitiveness
Since law and accounting services are often nondiscretionary, some professionals would likely try to pass those increased costs onto clients, industry officials said. But law and accounting firms are already under pressure from clients to freeze or cut their rates.
A bill that would suspend state tax credits would put Connecticut at a major competitive disadvantage to other states that are maintaining or expanding their tax credit programs, according to Joan McDonald, commissioner of the Department of Economic and Community Development.
“Tax credits help make it possible for companies to make needed investments in the state that otherwise might not happen in this economic climate,” she said in a statement.
