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Smaller Businesses Singing the Blues Over Budget Plan

By Greg Bordonaro and Brad Kane

February 21, 2011

Gov. Dannel P. Malloy’s state budget proposal left some leaders of small and medium-sized businesses wondering if Connecticut is truly open for business.

The common refrains were that the governor’s budget plan relies too heavily on tax increases, doesn't cut enough spending and provides a stimulus aimed at big business while doing little to promote small firm growth.

“The budget is largely a disappointment to small businesses,” said Andrew Markowski, Connecticut director of the National Federation of Independent Business. “While the governor said all the right things about Connecticut being open for business, there’s very little for small business job creation in the plan.”

In a budget where Malloy needed to eliminate a $3.2 billion deficit, he proposed raising taxes by $1.5 billion, putting 81 percent of the burden on individuals and 19 percent on businesses.

But business leaders point out that tax increases aimed at individuals such as the elimination of the sales tax exemptions and increases to the income tax will hurt them as well, especially firms that report their business income through a personal tax return.

In drafting the budget, Malloy’s senior advisor Roy Occhiogrosso explained, the administration talked to many businesses directly and indirectly and found most were pleased with the tax plan, believing their share of the sacrifice would be much larger.

“There were relieved,” Occhiogrosso said. “They seem to understand that a balance was struck. They seem to get it.”

Bonnie Stewart, a lobbyist for the Connecticut Business & Industry Association, said a balanced budget that doesn’t rely on borrowing is a step in the right direction. She remained hopeful further spending cuts will be proposed in the coming months as lawmakers parse through the two-year plan.

“We appreciated the governor’s speech because he made it clear that economic activity was going to turn the economy around,” Stewart said. “This proposal is a good first step, but we would like to see more spending cuts. We know that more can be done.”

While Malloy’s budget team admitted the highlight of his economic development package is geared toward big business — the so-called “First Five” initiative — they also said many of the existing tax credits and incentives that benefit small and medium-sized companies were carried over untouched.

Certain advocacy groups like the Connecticut Voices for Children have urged Malloy to cap or eliminate some tax credit programs, saying they drain too much money out of the state’s offers.

But that largely didn’t happen, except for new limitations on transferring the state’s film tax credits.

Some programs aimed at small companies were expanded. The cap on the Job Creation Tax Credit was raised from $11 million to $20 million. Malloy’s proposal also raised the cap from $500 million to $750 million on one of the state’s most successful incentive programs, the Urban and Industrial Site Reinvestment Tax Credit.

“We offer significant tax credits for small and large businesses,” said Benjamin Barnes, secretary of the Office of Policy & Management. “It’s true that the ‘First Five’ program is for large employers, but we continue to have a robust program of tax credits for small businesses as well.”

But while tax credits are positive attractors and retainers of businesses, Connecticut still has a reputation as a state hostile to business. Costs of energy, labor and health care remain high, and the tax code is burdensome, business leaders say.

And industry officials say anti-business sentiment from the legislature continually puts them on the defense, rather than allowing them time to work with lawmakers to make Connecticut more competitive. “The only time we feel safe is when the legislature is out of session,” said Kevin Maloney, president of Northeast Express Transportation in Windsor Locks.

The governor’s budget offered nearly $800 million in operational spending cuts, but it also relies on $1 billion in concessions from the public employee unions each year without laying out a specific plan on how to achieve those savings. And although Malloy said his budget reduces government spending, the all-funds budget in his plan actually increases 2.4 percent annually over the next two years to $19.28 billion and then $20.2 billion.

Malloy also didn’t address possible changes to the state’s costly defined benefit pension plan for its employees, said Oz Griebel, CEO of the MetroHartford Alliance. The state really needs a complete restructuring of the way it is run, he said.

“Whatever it is, there has to be a fundamental shift in how we deliver services to taxpayers, whether they are businesses or residents,” said Griebel, who was a Republican candidate for governor in the 2010 election.

Of particular concern to NFIB’s Markowski is the proposed $1.5 billion in tax hikes, especially increases to the income tax.

Malloy has proposed eight income tax brackets compared to the three currently on the books. The progressive scale ranges from 3 percent for joint filers earning up to $20,000 a year to 6.7 percent for joint filers earning $1 million.

Markowski said that the income tax hike will affect all types of businesses, including sole proprietors, limited liability companies and certain S corporations. He said 75 percent of small business owners report their business income through a personal tax return.

“This will stifle expansion and investment in businesses,” he said.

A newly proposed “throw-back” rule is also a threat to medium-sized manufacturers in Connecticut that do business outside the state, said Stewart of the CBIA. That proposal would allow Connecticut to collect income taxes on Connecticut corporations’ profits earned in a state that doesn’t collect income taxes.

“Any increases on business costs is going to slow down the economic recovery and increase the likelihood that more manufacturing jobs will flow out of the state where there is a lower cost of doing business,” said Gerry Mastropietro, president of the Smaller Manufacturers Association of Connecticut Inc.

Under Malloy’s proposal the sales tax rate would also increase from 6 percent to as high as 6.35 percent. Taxes would also increase on oil, insurance and electric generation companies.

While CT Inc. remains cool to the overall budget plan, they do see some bright spots.

“The Governor is not proposing to borrow more money to cover operating expenses, and that’s prudent,” Markowski said. “And he’s dedicating 70 percent of the gross receipts tax on petroleum to transportation, which the state needs very badly.”

Tax Increases

New Revenue

FY 2012 FY 2013

Insurance companies tax rate increase from 1.75% to 1.95% $25 $26

Establish “throw-back” rule $20 $20

Continue 10% corporate surcharge through 2013 $25 $45

Revise film tax credit transferability to 50% in ‘11 and 25% in ‘12 $6 $3

Increase sales tax rate to 6.25% $152 $158

Electric generation tax $58 $58

Estate tax $4 $4

Source: Connecticut office of policy & management

Job Creation Initiatives

• Establish “First Five” Program to provide incentives for up to five business development projects that commit to creating not less than 200 new jobs.

• Increase new job creation tax credit cap to $20 million.

• Lift 70 percent credit cap for job creation.

• Invest nearly $1 billion in transportation infrastructure over the next two years.

• Appropriate $130 million for supportive and affordable housing development and rehabilitation projects.

• Set aside $15 million per year for statewide tourism marketing.