Connecticut’s corporate tax structure disproportionately burdens small businesses, in part because big companies have access to tax credits not available to the little guy. Those credits mean that out of the top 100 corporations in Connecticut, 18 pay the minimum corporate income tax allowed under the law: $250. A fairer option would be to cut the overall tax rate in half, and then just eliminate those preferential credits, a legislative committee was told today.
The state imposes a 7.5 percent corporate income tax on businesses, which raises about $202 million each year. But companies can take advantage of 26 credits to help offset their corporate tax liability, leading to a $93 million loss. Because the credit system is so complex, it is usually savvier corporations who take advantage. Plus, in order to be eligible for a credit, a corporation must be registered as a C-corporation, not a limited liability corporation or other entity. Businesses filing as C-corporations are declining, while the number of LLC’s and other pass throughs are exploding, the legislature’s Program Review and Investigations Committee was told today. The bipartisan PRI Committee’s staff completed a months-long analysis of Connecticut’s tax structure, which lawmakers can use for ideas when they come back into session February 8. Of the 44,277 incorporated entities in the state, only 13 percent took any credit at all in 2003. Just 13 individual corporations claimed more than five credits. The credits to just those 13 companies alone were valued at $20 million. For those businesses that didn’t take credits, they wound up paying their full 7.5 percent.Cutting that 7.5 percent in half would cost the state revenue, but if all those credits also went away, it would cost $109 million, committee staff estimated. It would make Connecticut’s corporate tax one of the lowest in the country, and spread the burden equally among businesses. Despite this diagnosis, committee staff could only evaluate the corporate tax in a very limited way, it said, due to resistance from the Department of Revenue Services. When PRI staffers wished to access individual corporations’ tax returns, Attorney General Richard Blumenthal opined the committee was entitled to that information. But he quickly softened his public statements when Gov. M. Jodi Rell raised a firestorm of opposition. Republicans argued such inspections would violate taxpayers’ right to privacy, and Democrats backed off the issue. That tension manifested in the meeting today. Committee staff made a series of recommendations aimed at DRS, with the goal of making that agency do a better job collecting and analyzing data. That would help legislators make Connecticut’s tax code more efficient and fair, said state Rep. Brendan Sharkey (D-Hamden), PRI Committee co-chairman. “If we don’t get our arms around this, and if we don’t demand DRS get it’s act together, and if DRS doesn’t demand from us more staff, then we’re never going to be able to adopt comprehensive, quality tax policy in the State of Connecticut,” Sharkey said.PRI Republicans eventually voted to make these staff recommendations part of the committee’s final report, though co-chairwoman Cathy Cook (R-Mystic) said the idea of making DRS partly a research agency will be debated during the session.