Tax Analysts Blog

More Than a Surrender When It Comes to Taxing Business

Posted on Nov 11, 2015

There are a lot of nonsensical things about state taxation. For example, public finance experts say we should impose sales tax on services (we don't). Those experts say we should never subject business purchases to sales tax (we do). We also shouldn't use excise taxes for general fund spending, have tax holidays, or give film tax credits. We do, we do, we do.

Governors haven't been particularly good stewards of sound tax policy. Some (Democrat Andrew Cuomo of New York, Republican Chris Christie of New Jersey, etc.) are tax incentive machines. Some (Republicans Paul LePage of Maine and Sam Brownback of Kansas) have proposed or enacted tax cuts far bigger than their states could afford. I detest tax incentives. They are the epitome of bad policy. I'm all for tax cuts, but you can't cut a billion dollars in taxes without having a plan or even a discussion of how you will pay for it.

The latest craziness comes out of Connecticut. On June 30 Democratic Gov. Dan Malloy took the state's big-business community to the woodshed. The legislature passed, and Malloy signed, a combined reporting law, as well as extensions of a corporate tax surtax and limits on the use of net operating losses. Overall, it was a pretty bad day for big business in Connecticut. By the way, the combined reporting law was a good idea -- if you're going to tax corporate income, you should use combined reporting. Big businesses tend to hate combined reporting (just go to a Council On State Taxation conference and hang out for a while). In any event, the total tax hikes would raise about $2 billion.

None of this is crazy. The state needed money and it went with a good policy (combined reporting). Then things got interesting. It turns out that in response to higher taxes, a bunch of Connecticut companies either implied or explicitly stated that they would leave. Those companies included General Electric Co. Nobody wants to lose GE, Travelers Cos., or Aetna Inc. Sure, it's fun to kick corporations around and make them pay their "fair share," but nobody really wants them to leave. The governments and small businesses in the towns where these big corporations are located don't want them to leave. The tax hikes produced a flood of complaints from around the state.

The backlash caused Malloy and the legislature to rethink their position. To mollify GE and other companies, the state passed a law delaying implementing the combined reporting requirements for a year. This is one of those situations when good policy will always be trumped by the politics of fear. The state also brought the issue to the tax reform commission to analyze whether combined reporting was really necessary. If I were a betting man, I would say the commission will announce that it is unnecessary and the combined reporting law will be repealed.

But the fun didn't end with the political surrender to GE and other big corporations. As a great big "I'm sorry," the governor is proposing to adopt a single-sales-factor apportionment formula! So he went from whacking the corporations with a giant tax increase and the dreaded combined reporting to proposing a law that will provide the greatest tax relief short of repealing the corporate tax.

Single-sales-factor apportionment formulas reward companies that have people and property in the state. If you have lots of people (say, a headquarters) and few sales in the state, this formula will allow you to avoid most of your corporate income taxes. Connecticut is a small state. Big corporations don't have a lot of sales there (relative to the rest of the country). Why did Malloy do that? He says that switching to single-sales-factor apportionment would improve the coming mandatory combined reporting. Yes, indeed. But I think he meant improve it for the big corporations in the state. In his statement, he said the new apportionment formula would "support Connecticut-headquartered companies who invested in the future of our economy."

Malloy's other pro-business proposals were a 15-day exemption from the personal income tax for employees coming into the state for business development activities, restoration of the research and development credit that was cut back last June, and an allowance of most of the NOLs that were disqualified last June.

Remember, I don't like the state corporate income tax. States can't and won't enforce it. Malloy not only surrendered, but gave back much more. I think that's good for business in general. But what does it say about the political leadership in Connecticut?

Read Comments (2)

MIKE55Nov 11, 2015

I agree with all of this, with one additional point: Connecticut's biggest
mistake was trying to make combined reporting retroactive. That was greedy and
arrogant. Retroactive tax legislation is bad policy and a sure-fire way to pick
a political fight with the large companies within the state. Connecticut's
leaders badly misjudged their ability to manage the inevitable backlash, and
are now trying to save their political careers by what amounts to an apology

edmund dantesNov 12, 2015

Mr. Brunori, as I live in CT I have seen this situation up close and personal.
To set the stage, you need to know that CT has perhaps the worst climate for
business in all of the United States. All branches of government have been
openly hostile to private enterprise for many years--except for the generous
tax favors handed out to the close friends of the political insiders. Crony
capitalism rules. There are very few entry level jobs in the state, and we've
been losing population and businesses for for years. Our taxes are among the
highest in the nation, we don't fund public employee pensions, and even so we
can't balance the budget.
You should understand the sequence of events. GE and other large companies went
to the Governor and to the legislature *before* the retroactive tax hikes were
enacted. They warned of the dire effects. I am told that the GE warned
specifically that they definitely *would* leave the state if the law was
passed, but this was done privately, not in the press. They got no respect, as
usual, so the law was passed. Mike is correct that the retroactivity was a
bridge too far.
After the law was passed, the stories then became public about the concerns of
the GE and other businesses. The Democratic politicians then publicly heaped
scorn on those businesses for being unwilling to pay their "fair share." They
said that GE paid only $250 annually in corporate income taxes (state minimum,
and it is true). If a company couldn't pay more than that, they didn't belong
in CT anyway. In other words, the Democrats doubled down on zero respect for
business, beating up on business has become a habit with them. No credit was
given for the millions GE pays in property taxes, nor the millions paid by
their employees in income taxes. I am reliably told that GE has been an
outstanding corporate citizen, loaning its executives without charge to
Bridgeport and other communities, for example.
GE began its search for a new headquarters. Given the poor treatment by the
politicians, I will be astonished if they don't follow through. At this point,
it's about much more than money, it's about common decency from government
Now some of the politicians are beginning to regret calling GE's bluff. They
have begun to realize that taking pot shots at businesses isn't always free.
Sure, Malloy is talking about tax give backs, but they won't happen. They can't
happen. The state budget is wildly out of balance, even after passing the
massive tax hike last June. It will get much, much worse after GE leaves.
CT has far too many government employees, and we pay them far too much. This is
the root of the problem. The state has decided to go the way of Detroit.
GE pays Fairfield $1.7 million or so in real estate taxes on their
headquarters. Rumor has it that, as a lovely parting gift, they will give the
headquarters to Sacred Heart University to be used for the business school. You
know, the school named for GE's last CEO, Jack Welch.

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