Tax disclosure debate splits business

Kevin Lembo, Comptroller

Kevin Sullivan, commissioner, Department of Revenue Services

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A set of recommendations to enhance transparency in Connecticut's business tax system is creating a divide within the business community over how much access the public should have to information on government assistance to in-state companies.

Comptroller Kevin Lembo last week released 13 recommendations that aim to improve the transparency, efficiency and effectiveness of the state's business tax system, and many are centered on strengthening oversight of tax credits, loans and grants awarded to Connecticut companies.

His recommendations include establishing an online searchable database for business tax credits that would allow the public to access information on all state appropriations to businesses including loans and grants. He also calls for annual reports on the effective tax rates paid by businesses as well as a tax incidence analysis that discloses the exact entity paying an in-state tax.

An annual, publicly available review of each company in the state's business assistance portfolio is also on Lembo's wish list.

The Connecticut Business & Industry Association (CBIA) is raising red flags about some of the measures saying they could fuel an anti-business environment. But the National Federation of Independent Business (NFIB) is more open to the changes, saying small businesses — many of which don't qualify for the larger tax credit programs offered by the state — want more clarity over where tax dollars are being spent.

“I think it's a conversation that needs to be had,” said Andrew Markowski, Connecticut director of the NFIB.

Markowski said NFIB members are particularly in favor of the tax credit database, something they have lobbied for in the past in order to enhance transparency in government spending.

It's particularly important, Markowski said, at a time when the state is funneling tens of millions of dollars to businesses in the form of forgivable loans, grants and tax credits in order to stimulate economic activity.

Just recently, for example, the state announced a $115 million incentive package for hedge fund giant Bridgewater Associates to build a $750 million headquarters in Stamford.

“As long it's not too burdensome and information is being disclosed in a fair manner then we think transparency is a good thing,” Markowski said.

But Joe Brennan, a lobbyist for the CBIA, said certain information about businesses — including their effective tax rates, tax credits, and investments in research and development — have long been exempted from public disclosure for competiveness reasons.

Businesses would be less interested in participating in state programs if they were forced to make significant disclosures about their operations, he said. It also could ignite a major anti-business environment, particularly in a politically charged state like Connecticut.

If a company, for example, is forced to disclose that they have paid nearly no taxes to the state because tax credits offset their obligations, it could lead to significant political backlash.

“We feel like it could lead to a circus atmosphere setting companies up for demonstrations that would make Connecticut less favorable to do business,” Brennan said. “Tax disclosure has been an issue before the General Assembly numerous times and has been rejected.”

Lembo's recommendations are part of a broader debate likely to occur over the next few years on Connecticut's business tax system.

Lembo is a member of a nine-member Business Tax Policy Board empanelled by Gov. Dannel P. Malloy in January to review the state's business tax policies to ensure that Connecticut is getting the maximum return on its investments. The panel, which is chaired by Department of Economic and Community Development Commissioner Catherine Smith, and Kevin Sullivan, head of the Department of Revenue Services, will make its recommendations to Malloy and policymakers Oct. 1.

“The hope is we end up with a system that is fairer, clearer and more transparent than it is today,” Lembo said. Besides calls for greater transparency, Lembo also pitched several tax code changes including requiring combined reporting for all corporations and placing annual caps on tax credits expenditures.

Brennan, of the CBIA, said the business community would oppose both of those measures.

Meanwhile, DRS Commissioner Sullivan said his task force has established a preliminary list of recommendations including eliminating the corporate income tax surcharge as well as the business-to-business analysis, management and consulting service taxes.

Before any recommendations could become policy, Sullivan added, they need to be fully vetted for their fiscal and economic impact, and ultimately it will be Malloy and the legislature that makes any final decisions.

And changes won't happen overnight, but instead likely occur over a six-year period.

But the overriding goal, Sullivan said, is to better align the state's tax policy with its economic policy, something that has not always been considered by the legislature.