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BUSINESS TAX TASK FORCE SIMPLIFICATION FAIRNESS INVESTMENT GROWTH. AUGUST 21, 2012 (DISCUSSION DRAFT). TASK FORCE MISSION EXECUTIVE ORDER NO. 17 (JANUARY 12, 2012). Identify specific areas of business taxation
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BUSINESS TAX TASK FORCESIMPLIFICATIONFAIRNESSINVESTMENTGROWTH AUGUST 21, 2012 (DISCUSSION DRAFT)
TASK FORCE MISSIONEXECUTIVE ORDER NO. 17 (JANUARY 12, 2012) • Identify specific areas of business taxation and other issues, including tax credits and other tax benefits, that should be the focus of future legislation and state economic policy. • Evaluate the cost, benefit, efficiency, effectiveness and measurable performance of the current tax credit structure with respect to economic development, business retention and growth, and employment retention and growth.
OUR PROCESS • Invitational public hearing, briefings, reports, outreach & discussion. • Agreement on recommended areas of focus for analysis & action. • Report (October 1, 2012). • Specific 2012-2018 initiatives.
WHAT WE KNOW . . . • Prudent state expenditures & sufficient revenue for longer term fiscal stability are essential to a positive business climate. ** • Taxes are generally a modest factor in business decisions but can be important in specific cases & tax complexity encourages tax avoidance. • Connecticut’s comparative business tax burden is moderate, except for new investment & highest in nation property taxes. • DRS & DECD are generally viewed positively but lack essential tools & staffing to connect fiscal policy, tax policy & economic policy. • Connecticut unnecessarily exports tax benefits to other states & offshore. • Every tax picks winners and losers. Our state business taxes tend to pick a few winners but relatively more losers.
. . . WHAT WE KNOW • Business tax policy is cumulative, legacy-based, short-term revenue driven, weakly aligned with economic policy & out of sync with the emergent marketplace (global, mobile, virtual, contingent employment, intangible goods & services). • Business tax incentives (credits, exclusions, exemptions & reimbursements) weakly align with economic policy, encourage interstate & intrastate “tax shopping,” become “entitlements” & are disconnected from state budgeting – but can be important tools in specific cases. • Connecticut differentially taxes similar enterprises on the basis of chosen forms of doing business. • Business leader & investor perceptions of tax climate are often based on personal income & gift/estate taxes. • Business perception of tax climate includes complexity, uncertainty, lack of guidance, weak interagency coordination & costs of compliance.
TAX FAIR & JOB FRIENDLY “Open for business” means economic & revenue policies that work together. Our goal, over the next 6 years, is to make taxes more directly business fair & job friendly -- rather than rely on indirect, one-time inducements or retreat to policies that become an economic race to the bottom.
RECOMMENDATIONS Based on further specific analysis & phased over the next 6 years, Connecticut should consider action to . . .
CORPORATE INCOME TAX, BUSINESS ENTITY TAX & PASS-THROUGH PERSONAL INCOME TAX . . . • Define “doing business” more broadly in order to level the multi-state playing field & reduce exportation of tax benefits. • End the Corporate Income Tax “surcharge” as well as minimum Corporate Income Tax & Business Entity Tax “fees.” • Require annual on-line business registration with SOTS ($125 fee but eliminate current termination fee) as a condition of legally doing business. • Provide EZ filing for lower taxable income entities & electronic filing for all business taxes.
. . . CORPORATE INCOME TAX, BUSINESS ENTITY TAX & PASS-THROUGH PERSONAL INCOME TAX • Establish an ongoing DRS external advisory group on simplified business tax accounting & filing. • Add informational combined reporting for TY 13 in order to evaluate comparative business entity taxes.* • Standardize apportionment, factor weighting, sourcing & other tax drivers for all business entities.*/** • Transition to a single or standard simplified, uniform tax for all business entities – with access to all major credits.
BUSINESS TAX CREDITS . . . • Have DECD administer all business tax credits. • Sunset no use & low use tax credits, consolidate related tax credits. • Transition to competitive credits (rather than entitlement) with standard terms (transferability, duration, carry-forward & no carry-back). • Repurpose “stranded” R&D credits with phased claiming or transferability.
. . . BUSINESS TAX CREDITS • Establish a rolling budget cap on cumulative total value of authorized but unclaimed credits.* • Improve “transparency” with a searchable database & annual reporting on credits by entity, purpose, amount, required performance, status of performance or penalties & net in-state economic benefit.* • Establish DECD-led interagency working group to simplify credit approval process & improve inter-agency cooperation. • Limit expansion of credits against Personal Income Tax until transition to simplified, uniform business entity taxation.
OTHER BUSINESS TAX ISSUES • PERSONAL INCOME TAX, GIFT & ESTATE TAX • Clarify domicile “safe harbors” for (1) charitable activity, (2) limited business activity, and (3) pro-rata residence. • Eliminate gift tax. • Eliminate “reach back” for estates affected by new $2 million threshold & cap estate tax at $10 million. • Establish DRS, DECD & DOL working group on worker classification & contingent employment. • SALES & USE TAX • Broaden definition of “doing business” to level playing field. • Phase out business-to-business analysis, management & consulting service taxes .** • Establish DRS & DECD working group on e-commerce. • ADMINISTRATION • Strengthen DRS & DECD analytic capacity, establish higher education partnerships for applied tax & economic research.* • Tie DRS delinquency interest rates to market-based IRS rates. • Establish DRS LEAN project on tax rulings process.** • Establish DRS external editorial advisory group for forms & publications. • Implement DECD-led on-line “business portal.”
