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BUSINESS TAX TASK FORCEBUSINESS TAX TASK FORCE

SIMPLIFICATIONSIMPLIFICATIONFAIRNESSFAIRNESS

INVESTMENTINVESTMENTGROWTHGROWTH

AUGUST 21, 2012AUGUST 21, 2012

(DISCUSSION DRAFT)(DISCUSSION DRAFT)

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TASK FORCE MISSIONTASK FORCE MISSIONEXECUTIVE ORDER NO. 17 (JANUARY 12, 2012)EXECUTIVE ORDER NO. 17 (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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OUR PROCESSOUR PROCESS

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

• Agreement on recommended Agreement on recommended areas of focus for analysis & areas of focus for analysis & action.action.

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

• Specific 2012-2018 initiatives. Specific 2012-2018 initiatives.

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

longer term fiscal stability are essential to a positive longer term fiscal stability are essential to a positive business climate. business climate. ****

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

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

• DRS & DECD are generally viewed positively but lack DRS & DECD are generally viewed positively but lack essential tools & staffing to connect fiscal policy, tax essential tools & staffing to connect fiscal policy, tax policy & economic policy.policy & economic policy.

• Connecticut unnecessarily exports tax benefits to other Connecticut unnecessarily exports tax benefits to other states & offshore. states & offshore.

• Every tax picks winners and losers. Our state business Every tax picks winners and losers. Our state business taxes tend to pick a few winners but relatively more taxes tend to pick a few winners but relatively more losers.losers.

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. . . . . . WHATWHAT WE KNOW WE KNOW• Business tax policy is cumulative, legacy-based, short-Business tax policy is cumulative, legacy-based, short-

term revenue driven, weakly aligned with economic term revenue driven, weakly aligned with economic policy & out of sync with the emergent marketplace policy & out of sync with the emergent marketplace (global, mobile, virtual, contingent employment, (global, mobile, virtual, contingent employment, intangible goods & services). intangible goods & services).

• Business tax incentives (credits, exclusions, Business tax incentives (credits, exclusions, exemptions & reimbursements) weakly align with exemptions & reimbursements) weakly align with economic policy, encourage interstate & intrastate economic policy, encourage interstate & intrastate “tax shopping,” become “entitlements” & are “tax shopping,” become “entitlements” & are disconnected from state budgeting – but can be disconnected from state budgeting – but can be important tools in specific cases.important tools in specific cases.

• Connecticut differentially taxes similar enterprises on Connecticut differentially taxes similar enterprises on the basis of chosen forms of doing business.the basis of chosen forms of doing business.

• Business leader & investor perceptions of tax climate Business leader & investor perceptions of tax climate are often based on personal income & gift/estate taxes.are often based on personal income & gift/estate taxes.

• Business perception of tax climate includes complexity, Business perception of tax climate includes complexity, uncertainty, lack of guidance, weak interagency uncertainty, lack of guidance, weak interagency coordination & costs of compliance.coordination & costs of compliance.

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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 next 6 years, is to make taxes more more directlydirectly business fair & job business fair & job friendly -- rather than rely on friendly -- rather than rely on indirect, one-time inducements or indirect, one-time inducements or retreat to policies that become an retreat to policies that become an economic race to the bottom.economic race to the bottom.

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RECOMMENDATIONSRECOMMENDATIONS

Based on further specific Based on further specific analysis & phased over analysis & phased over the next 6 years, the next 6 years, Connecticut should 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 . . . • Define “doing business” more broadly in order Define “doing business” more broadly in order

to level the multi-state playing field & reduce to level the multi-state playing field & reduce exportation of tax benefits.exportation of tax benefits.

• End the Corporate Income Tax “surcharge” as End the Corporate Income Tax “surcharge” as well as minimum Corporate Income Tax & well as minimum Corporate Income Tax & Business Entity Tax “fees.” Business Entity Tax “fees.”

• Require annual on-line business registration Require annual on-line business registration with SOTS ($125 fee but eliminate current with SOTS ($125 fee but eliminate current termination fee) as a condition of legally doing termination fee) as a condition of legally doing business. business.

• 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.

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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

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

• Add Add informationalinformational combined reporting for TY 13 combined reporting for TY 13 in order to evaluate comparative business entity in order to evaluate comparative business entity taxes.taxes.**

• Standardize apportionment, factor weighting, Standardize apportionment, factor weighting, sourcing & other tax drivers for all business sourcing & other tax drivers for all business entities.entities.*/***/**

• Transition to a single or standard simplified, Transition to a single or standard simplified, uniform tax for all business entities – with access uniform tax for all business entities – with access to all major credits.to all major credits.

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

• Have DECD administer all business tax credits. Have DECD administer all business tax credits.

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

• Transition to competitive credits (rather than Transition to competitive credits (rather than entitlement) with standard terms entitlement) with standard terms (transferability, duration, carry-forward & no (transferability, duration, carry-forward & no carry-back). carry-back).

• Repurpose “stranded” R&D credits with Repurpose “stranded” R&D credits with phased claiming or transferability.phased claiming or transferability.

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

• Establish a rolling budget cap on Establish a rolling budget cap on cumulative total value of authorized but cumulative total value of authorized but unclaimed credits.unclaimed credits.**

• Improve “transparency” with a searchable Improve “transparency” with a searchable database & annual reporting on credits by database & annual reporting on credits by entity, purpose, amount, required entity, purpose, amount, required performance, status of performance or performance, status of performance or penalties & net in-state economic benefit.penalties & net in-state economic benefit.**

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

• Limit expansion of credits against Personal Limit expansion of credits against Personal Income Tax Income Tax untiluntil transition to simplified, transition to simplified, uniform business entity taxation.uniform business entity taxation.

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OTHER OTHER BUSINESSBUSINESS TAX ISSUES TAX ISSUES• PERSONAL INCOME TAX, GIFT & ESTATE TAXPERSONAL INCOME TAX, GIFT & ESTATE TAX

Clarify domicile “safe harbors” for (1) charitable activity, (2) Clarify domicile “safe harbors” for (1) charitable activity, (2) limited business activity, and (3) pro-rata residence. limited business activity, and (3) pro-rata residence.

Eliminate gift tax.Eliminate gift tax. Eliminate “reach back” for estates affected by new $2 million Eliminate “reach back” for estates affected by new $2 million

threshold & cap estate tax at $10 million. threshold & cap estate tax at $10 million. Establish DRS, DECD & DOL working group on worker classification Establish DRS, DECD & DOL working group on worker classification

& contingent employment.& contingent employment.

• SALES & USE TAXSALES & USE TAX Broaden definition of “doing business” to level playing field.Broaden definition of “doing business” to level playing field. Phase out business-to-business analysis, management & Phase out business-to-business analysis, management &

consulting service taxes .consulting service taxes .**** Establish DRS & DECD working group on e-commerce.Establish DRS & DECD working group on e-commerce.

• ADMINISTRATIONADMINISTRATION Strengthen DRS & DECD analytic capacity, establish higher Strengthen DRS & DECD analytic capacity, establish higher

education partnerships for applied tax & economic research.education partnerships for applied tax & economic research.** Tie DRS delinquency interest rates to market-based IRS rates.Tie DRS delinquency interest rates to market-based IRS rates. Establish DRS LEAN project on tax rulings process.Establish DRS LEAN project on tax rulings process.**** Establish DRS external editorial advisory group for forms & Establish DRS external editorial advisory group for forms &

publications.publications. Implement DECD-led on-line “business portal.”Implement DECD-led on-line “business portal.”

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SIMPLIFICATION, SIMPLIFICATION, FAIRNESS, INVESTMENT & FAIRNESS, INVESTMENT &

GROWTHGROWTH