Question Now Is Which Businesses, If Any, Should Still Have To Pay 'Entity' Levy
By CHRISTOPHER KEATING, Capitol Bureau Chief
February 23, 2008
With the economy clearly slowing down, everyone from the Republican governor to Democratic legislators to business lobbyists is calling for a cut in business taxes this year to help struggling mom-and-pop stores.
The mechanism is the elimination of the state's "business entity tax" of $250. That might seem small but it would save companies a combined $35 million per year. The tax is paid by more than 118,000 businesses organized as limited-liability companies, limited partnerships and other legal offshoots.
While Gov. M. Jodi Rell has called for the tax to be eliminated across-the-board, some lawmakers are calling for limits on which companies could receive the tax break. They question, for example, whether real estate developers — some of which could have 10 or 15 different limited-liability companies, or LLCs — should receive a tax cut for all of them.
Far from the small start-up company with just two employees, these LLCs include high-powered lobbying firms, highly profitable law firms and some of the largest corporations in Connecticut.
Senate Democrats and Connecticut Voices for Children, a New Haven-based think tank, say the list includes Purdue Pharma L.P., the gigantic pharmaceutical firm that sells the well-known prescription painkiller OxyContin. The Stamford-based company is privately owned and registered as a limited partnership, meaning that it would be on the list, officials said.
Some advocates are trying to slow down the fast-tracked tax cut, saying they want to avoid a giveaway to businesses that don't need a break.
"I'm focusing on how we can narrow the relief — as opposed to eliminating it altogether," said Rep. Cameron Staples, a New Haven Democrat who is co-chairman of the tax-writing finance committee. "We are trying to make sure relief gets to people who need it.
"If we have $35 million to target small business relief, is this the right way to do it?"
The $250 tax is lower than the $450 occupational fees that many professions pay to renew their licenses and continue practicing, Staples said. Those paying $450 every year include doctors, dentists, surgeons, chiropractors, veterinarians, podiatrists, psychologists and attorneys. Lead abatement and asbestos contractors pay $500 annually — twice as much as the business entity tax.
Staples could not explain why support for this particular tax cut has jelled this year on both sides of the aisle, along with longtime supporters like chambers of commerce and the Connecticut Business and Industry Association.
"That's a very good question," Staples said. "I'm asking the same question myself."
In an interview Friday, Rell said she wants to eliminate the tax entirely and is unsure whether profitable LLCs could be forced to continue paying the tax if nonprofitable LLCs do not. She also asked how an umbrella corporation, with 10 LLCs, could be treated if the state decides to eliminate an entire category of tax.
"Could we limit this to one?" Rell asked rhetorically. "The problem is, can you really do that if they all qualify under that? If they are very profitable, where do you draw the line? Remember on LLCs, people pay taxes already. They pay personal income tax."
Rather than paying the separate corporation tax, an LLC distributes profits to the partners — sometimes only two or three people — and they in turn pay personal income taxes on those profits.
Rell cited the case of a woman she met last year who operates a flower shop with her daughter as the only other employee.
"'That $250, I could use for advertising,'" Rell said, quoting the shop owner. "She said it's the nuisance of having to pay that tax when she could use it for other things that are more likely to generate more business. I thought that was a classic answer and pretty much what we hear from everyone else."
Sen. Jonathan Harris, a West Hartford Democrat and an attorney who has three LLCs in his private business, said the cut could allow a small business to pay energy bills or buy a laptop computer. Allowing a business owner with 15 LLCs to receive a $250 cut for each of them is "probably not" the best way to deliver the tax cut, he said.
"The intent is good, but as usual, the devil is in the details," Harris said.
In a year when the tax cut has generated bipartisan support, Secretary of the State Susan Bysiewicz, a Democrat, gathered leaders of chambers of commerce from around the state — along with legislators — in mid-January to call for the tax cut. The Senate Democrats called for the cut soon afterward, saying it should be narrowly tailored to small businesses. Bysiewicz's office oversees the registration of businesses that are subject to the tax, but the office does not keep any records on which companies are profitable and which are not.
The office also does not keep records on the revenues generated by the companies, but Bysiewicz's spokesman said they are mostly small businesses.
"There aren't 118,000 high-powered lobbying firms and multimillion-dollar businesses in the state," said Adam Joseph, Bysiewicz's spokesman. Large companies are "not going to miss the $250," he continued. "But for a small business, that's their electrical bill for the month. It's a way to help the little guy get ahead. That's the goal."
Shelley Geballe, an attorney at Connecticut Voices For Children, said that 18 of the state's 100 largest companies in 2003 paid the $250 tax. Created in 2002, the tax generated $32.2 million from 118,775 business entities in 2006, she said.
A coalition of anti-poverty groups criticized lawmakers' enthusiasm for cutting the tax. Leaders of the One Connecticut coalition said eliminating the $250 annual tax will create a $35 million hole in the budget that could otherwise go directly to low-income families through the earned income tax credit.
"You don't want to throw the baby out with the bathwater," said Lucy Nolan, executive director of End Hunger Connecticut and chairwoman of One Connecticut. "It seems like we're trading off one thing and not having the best effect."
But Republican and Democratic lawmakers support axing the tax, saying small businesses are the ones who feel the pinch of the fee the most.
"For your plumber, your electrician, your painter, your carpenter ... that's where that tax hurts tremendously," Senate Republican leader John McKinney said.
McKinney was quick to dismiss the idea that the tax should be eliminated selectively, saying it would create more paperwork and cost in the Department of Revenue Services.
"That would cost more than $250 per business to do that," McKinney said, "so it wouldn't make any sense."
Courant Staff Writer Magdalene Perez contributed to this report.
Reprinted with permission of the Hartford Courant.
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