Tax credits are spending through the tax code. Since tax credits are designed to achieve specific policy objectives, these "tax expenditures" have much in common with direct expenditures, yet they mostly evade the standards of accountability and transparency required of traditional spending measures.
Connecticut relies heavily on tax credits to promote economic development. The state's spending on corporation business tax credits increased 27-fold from 1987 to 2008, even after adjusting for inflation. This review of Connecticut business tax credits finds:
- Some credits are ineffective, and others may even be damaging to Connecticut's economy.
- Many tax credits are available to corporations even if they have no state business tax liability.
- Relatively few tax credits put a ceiling on the total amount that can be claimed in a given year. As a result, the state's total spending on tax credits is open-ended.
- No comprehensive economic development plan seems to guide the adoption of new tax credits or review of existing ones, nor do effective accountability procedures exist.
- Business tax credits reduce the transparency of the state's economic development efforts.
The brief recommends regular, comprehensive review of tax credits' effectiveness; disclosure of which companies receive how much of which credits; and greater consideration of business tax credits within the state's overall economic strategy.
