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BUSINESS TAX TASK FORCE BUSINESS TAX TASK FORCE REPORTREPORT

SIMPLER, FAIRER, SMARTER & SIMPLER, FAIRER, SMARTER & GROWING CONNECTICUT’S GROWING CONNECTICUT’S

ECONOMY ECONOMY

SEPTEMBER 27, 2012SEPTEMBER 27, 2012

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TASK FORCE MISSIONTASK FORCE MISSIONGOVERNOR MALLOY’S EXECUTIVE ORDER NO. 17 GOVERNOR MALLOY’S EXECUTIVE ORDER NO. 17

(JANUARY 12, 2012)(JANUARY 12, 2012)

• Identify specific areas of business Identify specific areas of business taxationtaxationand other issues, including tax credits and other issues, including tax credits and other tax benefits, that should be and other tax benefits, that should be the focus of future legislation and state the focus of future legislation and state economic policy.economic policy.

• Evaluate the cost, benefit, efficiency, Evaluate the cost, benefit, efficiency, effectiveness and measurable effectiveness and measurable performance of the current tax credit performance of the current tax credit structure with respect to economic structure with respect to economic development, business retention and development, business retention and growth, and employment retention and growth, and employment retention and growth.growth.

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TASK FORCE MEMBERSTASK FORCE MEMBERS

Co-ChairsCo-Chairs

• Commissioner Kevin Sullivan, Department of Revenue Commissioner Kevin Sullivan, Department of Revenue ServicesServices

• Commissioner Catherine Smith, Department of Community & Commissioner Catherine Smith, Department of Community & Economic DevelopmentEconomic Development

• State Comptroller Kevin LemboState Comptroller Kevin Lembo

• Acting Commissioner Dennis Murphy, Department of Labor Acting Commissioner Dennis Murphy, Department of Labor

• Deputy Secretary Karen Buffkin for Secretary Ben Barnes, Deputy Secretary Karen Buffkin for Secretary Ben Barnes, Office of Policy & Management Office of Policy & Management

• Shelagh McClure for State Treasurer Denise NappierShelagh McClure for State Treasurer Denise Nappier

• Christopher Bruhl, Business Association ExecutiveChristopher Bruhl, Business Association Executive

• Dr. Steven Lanza, Economist Dr. Steven Lanza, Economist

• Julie McNeal, CPAJulie McNeal, CPA

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OUR ECONOMYOUR ECONOMY• Businesses create jobs & jobs create opportunity for the people of Connecticut. Businesses create jobs & jobs create opportunity for the people of Connecticut.

Most business taxes are passed along to consumers. Reducing taxes for middle Most business taxes are passed along to consumers. Reducing taxes for middle income consumers & lower income working families puts money back into state income consumers & lower income working families puts money back into state businesses & the economy.businesses & the economy.

• Effective economic development policy focuses on retaining, growing & attracting Effective economic development policy focuses on retaining, growing & attracting strategic business sectors and clusters that are innovative, high value-added, strategic business sectors and clusters that are innovative, high value-added, productive, and offer good employment with good benefits. productive, and offer good employment with good benefits.

• Coherent & stable tax policy encourages business location, retention, and growth Coherent & stable tax policy encourages business location, retention, and growth that provides jobs, stimulates economic activity, & strengthens our state and local that provides jobs, stimulates economic activity, & strengthens our state and local tax base. tax base.

• The common purpose of state tax, economic, & fiscal policy is securing a vibrant The common purpose of state tax, economic, & fiscal policy is securing a vibrant business climate that encourages business investment, activity, employment, and business climate that encourages business investment, activity, employment, and revenue allocation in Connecticut. revenue allocation in Connecticut.

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OUR PROCESSOUR PROCESS

• Invitational public hearing, Invitational public hearing, briefings, reports, outreach, & briefings, reports, outreach, & discussion.discussion.

• Agreement on recommended Agreement on recommended areas for action.areas for action.

• Report (October 1, 2012).Report (October 1, 2012).

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WHAT WE KNOW . . .WHAT WE KNOW . . . • Prudent state expenditures & sufficient revenue for longer Prudent state expenditures & sufficient revenue for longer

term fiscal stability in a balanced state budget are essential term fiscal stability in a balanced state budget are essential to a positive business climate.to a positive business climate.

• Taxes are generally a Taxes are generally a modestmodest factor in business decisions factor in business decisions but can be important in specific cases, while tax complexity but can be important in specific cases, while tax complexity only encourages tax avoidance.only encourages tax avoidance.

• Connecticut’s comparative business tax burden is moderate, Connecticut’s comparative business tax burden is moderate, except for new investment, property taxes, & business except for new investment, property taxes, & business services.services.

• DRS & DECD are generally viewed positively but need to DRS & DECD are generally viewed positively but need to operate with more clarity & consistency while adding operate with more clarity & consistency while adding essential tools to analyze the impact or dynamic interactivity essential tools to analyze the impact or dynamic interactivity of tax policy, economic policy, & fiscal policy. of tax policy, economic policy, & fiscal policy.

• Every tax creates incentives & disincentives, picks winners & Every tax creates incentives & disincentives, picks winners & losers, & results in a complex array of business entities, losers, & results in a complex array of business entities, investments, contractual arrangements, & employment investments, contractual arrangements, & employment relations – so change must be carefully considered in order to relations – so change must be carefully considered in order to avoid instability & unintended economic consequences.avoid instability & unintended economic consequences.

• To the extent that the annual legislative process To the extent that the annual legislative process continuously raises tax or tax policy questions, discussions & continuously raises tax or tax policy questions, discussions & revisions, the result can be unsettled business expectations revisions, the result can be unsettled business expectations that undermine a positive business climate.that undermine a positive business climate.

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• Business tax policy is cumulative, legacy-based, revenue driven, Business tax policy is cumulative, legacy-based, revenue driven, insufficiently aligned with economic policy, & inadequately insufficiently aligned with economic policy, & inadequately reflects the emergent marketplace (global, mobile, virtual, reflects the emergent marketplace (global, mobile, virtual, contingent employment, intangible goods & services).contingent employment, intangible goods & services).

• Business tax incentives are insufficiently aligned with state Business tax incentives are insufficiently aligned with state economic policy, encourage interstate & intrastate “tax economic policy, encourage interstate & intrastate “tax shopping,” & are disconnected from state budgeting – but are shopping,” & are disconnected from state budgeting – but are important economic development tools. important economic development tools.

• Connecticut should not try to compete with low wage, low Connecticut should not try to compete with low wage, low benefit, or low public investment states, but does need to stay benefit, or low public investment states, but does need to stay competitive within the Northeast region in terms of business tax competitive within the Northeast region in terms of business tax policy, taxes, & incentives.policy, taxes, & incentives.

• Connecticut differentially & inequitably taxes similar enterprises Connecticut differentially & inequitably taxes similar enterprises solely on the basis of chosen forms of doing business, but any solely on the basis of chosen forms of doing business, but any overall change in business taxation requires careful overall change in business taxation requires careful consideration of impact & transition.consideration of impact & transition.

• Business leader & investor views of tax climate are influenced Business leader & investor views of tax climate are influenced by personal income & gift/estate taxes.by personal income & gift/estate taxes.

• Complexity, weak interagency coordination, & cost of Complexity, weak interagency coordination, & cost of compliance adversely influence business operations, strategies, compliance adversely influence business operations, strategies, & decisions. & decisions.

• Consistent application of law, avoidance of retroactive changes, Consistent application of law, avoidance of retroactive changes, & reliable guidance are positive attributes of fair, effective, & & reliable guidance are positive attributes of fair, effective, & efficient business taxes.efficient business taxes.

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TAX FAIR & JOB FRIENDLYTAX FAIR & JOB FRIENDLY

““Open for business” means Open for business” means economic & revenue policies that economic & revenue policies that work together. Our goal, over the work together. Our goal, over the next 6 years, is to make taxes more next 6 years, is to make taxes more directlydirectly business fair & job friendly business fair & job friendly without jeopardizing fiscal without jeopardizing fiscal stability, retreating to policies that stability, retreating to policies that become an economic race to the become an economic race to the bottom, or shifting the burden to bottom, or shifting the burden to middle income taxpayers. middle income taxpayers.

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RECOMMENDATIONSRECOMMENDATIONS• The goal of these recommendations is The goal of these recommendations is

to support a growth-oriented to support a growth-oriented economic climate that:economic climate that: Is beneficial & fair for taxpayers.Is beneficial & fair for taxpayers. Helps businesses thrive & compete Helps businesses thrive & compete

effectively.effectively. Grows enterprise, good jobs, Grows enterprise, good jobs,

incomes, & consumer buying power.incomes, & consumer buying power.

• Based on further specific analysis & Based on further specific analysis & starting now but phased over the starting now but phased over the next 6 years, Connecticut should next 6 years, Connecticut should consider action to .consider action to . . . . .

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CORPORATE INCOME TAX, BUSINESS CORPORATE INCOME TAX, BUSINESS ENTITY TAX & PASS-THROUGH ENTITY TAX & PASS-THROUGH PERSONAL INCOME TAX . . . PERSONAL INCOME TAX . . .

• Clarify current definition of “engaging in Clarify current definition of “engaging in business” in order to assure a level business” in order to assure a level playing field for in-state businesses.playing field for in-state businesses.

• Phase out the Corporate Income Tax Phase out the Corporate Income Tax “surcharge,” minimum Corporate “surcharge,” minimum Corporate Income Tax, & Business Entity Tax. Income Tax, & Business Entity Tax.

• Require annual, combined on-line Require annual, combined on-line business/tax registration as a condition business/tax registration as a condition of legally engaging in business but of legally engaging in business but eliminate current business termination eliminate current business termination fee.fee.

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. . . CORPORATE INCOME TAX, . . . CORPORATE INCOME TAX, BUSINESS ENTITY TAX & PASS-BUSINESS ENTITY TAX & PASS-THROUGH PERSONAL INCOME TAXTHROUGH PERSONAL INCOME TAX

• Provide EZ filing for lower taxable income Provide EZ filing for lower taxable income entities & electronic filing for all business taxes.entities & electronic filing for all business taxes.

• Establish a DRS external advisory group on Establish a DRS external advisory group on simplified business tax accounting & filing.simplified business tax accounting & filing.

• Standardize apportionment, factor weighting, & Standardize apportionment, factor weighting, & sourcing. sourcing.

• Evaluate impact & transition to a standard Evaluate impact & transition to a standard simplified, uniform business entity tax with simplified, uniform business entity tax with access to all major credits.access to all major credits.

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BUSINESS TAX CREDITS . . .BUSINESS TAX CREDITS . . .

• Have DECD administer all major tax credits Have DECD administer all major tax credits available to businesses. available to businesses.

• Sunset no use & low use tax credits, Sunset no use & low use tax credits, consolidate related tax credits.consolidate related tax credits.

• Going forward, credits need to be better Going forward, credits need to be better aligned with the state’s overall economic aligned with the state’s overall economic strategy, driven by measurable strategy, driven by measurable performance, & accountable for results. performance, & accountable for results.

• Rationalize credit terms (duration relative Rationalize credit terms (duration relative to investment return, transferability, carry-to investment return, transferability, carry-forward & no carry-back for all credits).forward & no carry-back for all credits).

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. . . BUSINESS TAX CREDITS. . . BUSINESS TAX CREDITS• Provide annual budget reporting that tracks total Provide annual budget reporting that tracks total

cumulative authorized & claimed credits.cumulative authorized & claimed credits.

• Provide a searchable DECD database for state tax Provide a searchable DECD database for state tax credits & other business assistance programs as credits & other business assistance programs as well as periodic reporting, both to include entity, well as periodic reporting, both to include entity, purpose, amount, required performance, & status purpose, amount, required performance, & status of performance plus dynamic analysis of net of performance plus dynamic analysis of net direct & indirect state economic benefit & state direct & indirect state economic benefit & state tax impact – balanced with the need to protect tax impact – balanced with the need to protect confidential tax & proprietary business confidential tax & proprietary business information.information.

• Establish DECD-led interagency working group to Establish DECD-led interagency working group to simplify credit approval process & improve inter-simplify credit approval process & improve inter-agency cooperation.agency cooperation.

• Limit expansion of credits against Personal Limit expansion of credits against Personal Income Tax in order to protect core state revenue Income Tax in order to protect core state revenue stability. stability.

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OTHER BUSINESS TAX ISSUES . . OTHER BUSINESS TAX ISSUES . . ..

• SALES & USE TAXSALES & USE TAX Phase down sales taxes on consumer purchases.Phase down sales taxes on consumer purchases. Phase out taxation of business-to-business computer Phase out taxation of business-to-business computer

& data-processing services, analysis, management & & data-processing services, analysis, management & management consulting services.management consulting services.

Clarify current definition of “engaging in business” in Clarify current definition of “engaging in business” in order to assure a level playing field for in-state order to assure a level playing field for in-state businesses. businesses.

Clarify manufacturing exemption for mixed use Clarify manufacturing exemption for mixed use businesses & repairs.businesses & repairs.

Establish DRS & DECD working group on taxation of Establish DRS & DECD working group on taxation of e-commerce.e-commerce.

• PERSONAL INCOME TAX, GIFT & ESTATE TAXPERSONAL INCOME TAX, GIFT & ESTATE TAX Provide domicile “safe harbors” for charitable Provide domicile “safe harbors” for charitable

activity, limited business activity, & pro-rata activity, limited business activity, & pro-rata residence. residence.

Eliminate gift tax.Eliminate gift tax. Cap individual estate tax liability. Cap individual estate tax liability. Establish DRS, DECD, & DOL working group on worker Establish DRS, DECD, & DOL working group on worker

classification & contingent employment.classification & contingent employment.

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. . . . . . OTHER BUSINESS TAX OTHER BUSINESS TAX ISSUESISSUES• PROPERTY TAXPROPERTY TAX

Establish OPM, DRS, & DECD working group on Establish OPM, DRS, & DECD working group on business property taxation.business property taxation.

• ADMINISTRATIONADMINISTRATION Identify appropriate revenue & economic modeling, Identify appropriate revenue & economic modeling,

strengthen DRS & DECD analytic capacity, establish strengthen DRS & DECD analytic capacity, establish higher education partnership for tax & economic higher education partnership for tax & economic research.research.

Tie DRS delinquency interest rates to market-based Tie DRS delinquency interest rates to market-based IRS rates.IRS rates.

Implement DRS lean process improvement project for Implement DRS lean process improvement project for tax rulings.tax rulings.

Establish DRS external editorial advisory group for Establish DRS external editorial advisory group for forms & publications.forms & publications.

Implement DECD-led on-line “business portal.” Implement DECD-led on-line “business portal.” Offer an annual informational program for state Offer an annual informational program for state

legislators on the inter-relationship of state business legislators on the inter-relationship of state business tax & economic policies.tax & economic policies.

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BUSINESS TAX TASK FORCE BUSINESS TAX TASK FORCE SIMPLER, FAIRER, SMARTER & SIMPLER, FAIRER, SMARTER &

GROWING CONNECTICUT’S ECONOMYGROWING CONNECTICUT’S ECONOMY