CT Adjusts Tax Code To Encourage Small Business Hiring

If Connecticut is going to add more jobs in the recovery, small business will have to be a key part of that employment growth. As part of WNPR’s small business project, Harriet Jones reports on how the state is trying to use its tax code to make that easier.

Taking on your first employee is a huge step for any business.

“One of the greatest things you can do in life is to be a good employer—it’s so satisfying. And it changes the world. If you want to change the world, hire someone.”

Rhonda Abrams is the small business columnist for USA Today. She had run her own business solo for 14 years before she hired her first employee, and she says that’s the case for millions of businesses across the country.

“But if just 1% of those non-employer businesses hired one employee, it would create 200,000 new jobs, which is astonishing.”

Abrams says the biggest thing policymakers can do to promote that job creation is to give companies a break on their taxes if they hire an employee. Hiring an employee is expensive. You must pay workers’ compensation, unemployment insurance, FICA tax, and new administrative payroll costs. That’s something that Connecticut tried to address in a jobs bill enacted last summer. Joan MacDonald is Commissioner of the Department of Economic and Community Development.

“Connecticut had a job creation tax credit on the books that only applied to the corporate tax rate and you had to add 10-plus jobs. That was amended to allow small businesses to add one job, and to apply it to their personal tax rate.”

The tax credit amounts to $200 per employee per month. So far in the six months since it was passed, just 10 businesses have applied for the credit, but MacDonald says she’s confident the uptake will improve as the benefit becomes better known and as the recovery takes hold.

“I think they were waiting to see the changes on the federal level for the personal income tax, which the congress enacted and the president signed. So I think we’ll start to see more certainty and we’ll see more small companies taking advantage of that.”

Another tax credit passed in Connecticut’s jobs bill was that for angel investors – they now get a 25% credit for investments of $100,000 or more in a small business in the state. Angel investor Liddy Karter of Iron Ventures says that’s definitely spurred activity.

“We’ve seen in Connecticut, more angels interested in Connecticut deals. Before they were looking all over—we’re not far from New York or Rhode Island and Massachusetts, but now people are saying that they’d rather invest in Connecticut, and people are coming from other states looking for ways to work into our deals as well.”

But of course using the tax code costs money, and it’s also something of a blunt instrument. Denise Merrill, who was majority leader in the state House of Representatives last year, was one of the architects of that jobs bill. She’s now Secretary of the State.

“If you’re going to try to use the tax code at all it has to be fairly broad based, you don’t want to be doing tax credits for very specific industries. And so that’s the tension that we ran up against, and you’re going to hear it discussed I think by policymakers this coming session because it really does put a lot of holes in your revenue.”

The use of corporate tax credits has been controversial in the past, criticized for unnecessarily complicating the tax code, and failing to produce any meaningful economic stimulus. DECD itself recently produced a report for the legislature that calls for an end to several ineffective tax credit programs. But that kind of tinkering is unpopular in the business community, which says it’s hard to invest if you don’t know what your tax liability will be from year to year. And in a recent speech to the CBIA, Governor Dannel Malloy pledged to bring clarity.

“It is of great concern to the business community that there be some consistency. That they know what direction we’re heading in. That they can have some confidence in our tax policies and in our incentives. We need to be clear.”

But Malloy has an immense task ahead as he prepares to present his first budget. Already on his desk he has recommendations to create special tax-free zones in cities and industrial regions as a way of promoting economic activity. It should become clearer in the next few weeks just how he intends to use the tax code as he tackles the record state deficit.

For WNPR, I'm Harriet Jones.