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Thinking About Tax Expenditures
By Connecticut Department of Revenue Services Commissioner
Kevin Sullivan
Commissioner's Column
The opinions expressed in this article are those of the Commissioner of the Department of Revenue Services and
do not reflect the opinion or the position of the Connecticut Society of Certified Public Accountants, nor does the
appearance of this article in Connecticut CPA constitute any form of endorsement of the article or its content.
here's a big surprise coming for
states, municipalities, and other
government agencies that use
an ever-widening array of business
tax sweeteners in quest of economic
growth. GASB now requires govern-
ment balance sheets to account for tax
abatements as contingent liabilities.
Still, what we see will only be the tip
of the iceberg. There are also so many
tax credits, exemptions, and exclu-
sions that pick business winners and
losers every day.
In our globalized economy, states and
localities face a beggar-thy-neighbor
competition to lure or retain business.
Connecticut is no exception. To its
credit, our Department of Economic
and Community Development increas-
ingly advocates only for business tax
expenditures and other investments
that result in job creation and are
consistent with statewide economic
strategy. Unfortunately, every legisla-
tive session brings new business tax
breaks that are problematic in terms of
demonstrable and sustainable benefit.
Similarly, even hard-boiled business
leaders often suspend disbelief when
it comes to business tax expenditures.
All this despite the fact that there is no
evidence that taxes factor significantly
into business locational decisions.
The recent example of GE's corporate
headquarters relocation to Massachu-
setts is illustrative. For all the political
talk that GE moved because of Con-
necticut's business tax burden, the re-
ality was very different. If we disregard
the $145 million package of tax breaks
gifted to GE, taxes on the company's
headquarters property in Connecti-
cut were probably lower than in Mas-
sachusetts. Then there are the recent
negative reviews for the "Start-Up New
York" tax incentive program only 408
new jobs each costing nearly $130,000
on average.
Still, some of Connecticut's business
tax credits make a lot of sense and re-
ally do work. When the state rewards
businesses that invest in research and
development or investors who commit
risk capital to new enterprises, we all
benefit. The economy grows through
new jobs, greater productivity and in-
creased competitiveness. Governor
Malloy's initiative to re-purpose UTC's
earned but unclaimed R&D tax credits
in exchange for new investment in jobs
and facilities in Connecticut is a great
success story.
But the bulk of Connecticut's over
20 separate business tax credits are
hardly economically transformative.
Indeed, many are more valued as com-
modities to be sold or transferred with
little regard for tax policy or economic
purpose. Annually, these credits cost
over $185 million. Cumulatively, the
state's estimated unfunded liability
is over $2 billion just for outstanding
unclaimed R&D credits. This does not
even count the similar long-term cost
of municipal property tax abatements.
Then, there are dozens of business-
related exemptions from sales tax and
other state taxes, costing more than
$600 million annually. Most of these
tax breaks are really in the nature of
earmarks unrelated to renewal of the
state's overall economy. In addition,
federal protectionism continues to give
a huge tax break to remote sellers that
unfairly compete with main street re-
tailers by being allowed not to charge
or collect sales taxes.
Beyond the fiscal impact, there are
other reasons to question govern-
ment's fascination with tax expendi-
tures. Any form of business tax pref-
erence is economic protectionism and
an unfair competitive advantage. The
marketplace may often be frustrating,
but it's usually better than govern-
ment at picking business winners and
losers. Piling on new business tax ex-
penditures undercuts the more impor-
tant work of actually having a larger
economic vision, strategy, and plan
of action. Most important of all, tax
expenditures come at the expense of
holding down or even lowering overall
tax rates in order to make Connecticut
more competitive.
Altogether, the Legislature's Office of
Fiscal Analysis estimates that the an-
nual cost of state tax expenditures for
FY17 is nearly $6.5 billion. For sales tax
alone, it's over $4 billion (not including
services that are not taxed because
the services are not expressly enumer-
ated as being legally taxable). Just for
comparison, even half that amount
could cut Connecticut's general sales
and use tax rate from 6.35% to 4.25%.
We need to make business tax breaks
less of a blunt instrument and more
of a precision economic development