Location:
ECONOMIC DEVELOPMENT; JOB DEVELOPMENT; TAXATION;
Scope:
Connecticut laws/regulations;

OLR Research Report


July 1, 2010

 

2010-R-0282

JOB CREATION TAX CREDIT PROGRAMS

By: James Orlando, Legislative Analyst

You asked for a history and summary of three job creation tax credit programs, including any amendments since creation and differences between the programs.

SUMMARY

PA 06-186 ( 80) established a jobs creation tax credit program (CGS 12-217ii). The program was later amended by PA 07-250 ( 18). As amended, the program allows credits against the insurance premium, corporation, or utility company tax for companies that create at least 10 new full-time jobs in Connecticut. A company's maximum credit is 60% of the state income tax withheld from the new employees' wages for up to five consecutive years.

PA 10-75 established two additional job creation tax credit programs. Both programs were effective on May 6, 2010 and are applicable to income years beginning on or after January 1, 2010. One program allows insurance premium, corporation business, and personal income tax credits for small businesses (those with fewer than 50 employees in Connecticut) creating new full-time jobs (PA 10-75 8). Another program allows similar tax credits for businesses hiring Connecticut residents with disabilities receiving vocational rehabilitation services from specified agencies who work at least 20 hours per week (id. 9). PA 10-1, June Spec. Sess. (JSS) 18, expanded the range of new employees that

qualify businesses for the latter credit to include people with blindness, and made other changes as detailed below. Both programs authorize three-year credits of $200 per month for each new employee.

All three programs have more detailed eligibility and application criteria, as discussed below. PA 10-75 ( 10) imposes a combined $11-million-per-year cap on these three programs.

Table 1, attached to this report, compares the major features of the three programs.

JOBS CREATION TAX CREDIT PROGRAM

This program allows tax credits against eligible companies' insurance premium, corporation, or utility company tax. Under PA 06-186, the credit applied only to companies not previously conducting business in Connecticut who (1) relocated to Connecticut and (2) created at least 50 new full-time jobs in the state. PA 07-250 extended the program to any company that creates at least 10 new full-time jobs in the state. Full-time jobs are defined as those requiring employees to work at least 35 hours per week, not including temporary or seasonal jobs.

Under PA 06-186, the credit equaled up to 25% of the state income tax withheld from the new employees' wages for up to five consecutive years. PA 07-250 increased this percentage to 60%. Credits must be taken in the same income year they are earned. Unused credits expire.

PA 07-250 also made minor adjustments in credit eligibility, application, and approval requirements.

An employee who worked in Connecticut for a related party to the applicant within the preceding 12 months is not eligible. An employee worked for a related party if:

1. it controlled the business that subsequently hired the employee,

2. the business that hired the employee controlled the business that previously employed him or her,

3. the business that employed him or her is part of a larger business entity that also controls the business that hired him or her, or

4. both businesses belong to the same group of controlled businesses.

Companies must apply to the Department of Economic and Community Development (DECD) commissioner for the credits. The commissioner may approve full or partial credits only if the proposed increase in jobs (1) is not economically viable without the credits and (2) provides a net benefit to economic development and employment in the state. PA 07-250 also makes it a condition of DECD's approval that the proposed job growth conform to the State Plan of Conservation and Development.

The application for the credit, on a DECD form, must contain enough information to show that the job growth will provide net benefits for the economy of the host municipality and the state. Applicants must provide a description of the number of jobs to be created, feasibility studies or business plans, projections of the state and local revenue that could result, and any other information needed to evaluate the credit.

When she approves an application for a credit, the DECD commissioner must issue an allocation notice. Within 30 days of the end of the taxpayer's income year, the taxpayer must give the commissioner information about the number of new jobs created during the year and the income taxes withheld from the new employees' wages for the year. The commissioner must, within 60 days after the close of the taxpayer's income year or 30 days after the taxpayer provides the required information, whichever comes first, issue an eligibility certificate that includes the taxpayer's name, number of new jobs created, and the amount of the credit for the year. Upon request, the commissioner must give the Department of Revenue Services (DRS) commissioner a copy of the eligibility certificate.

The program contains a recapture schedule if the number of new employees falls below that for which a taxpayer claimed credits and they are not replaced by other new employees (excluding employees transferred from another location or from a related party) (CGS 12-217ii).

SMALL BUSINESS JOB CREATION TAX CREDIT

PA 10-75 authorizes insurance premium, corporation business, and personal income tax credits for small businesses (those with fewer than 50 employees in Connecticut) creating new full-time jobs filled by new employees who reside in Connecticut. Businesses qualify for the credits only for jobs created after May 6, 2010 during the businesses' income years beginning on or after January 1, 2010 and before January 1, 2013. The job must require the new employee to work at least 35 hours per week for at least 48 weeks per calendar year. New temporary or seasonal jobs do not count toward the credit. The act authorizes credits for up to three years at $200 per month per new employee. A business cannot apply the credit against its payroll withholding taxes.

Depending on how they are organized, some businesses do not pay business taxes, but their owners pay personal income taxes on the income they received from the business. The act allows these taxpayers to claim credits against the income tax, but specifies that the value of the credits cannot exceed the tax owed.

Businesses claiming the act's credits for hiring new employees cannot count these employees toward other credits the law allows, including those authorized under the job incentive and the enterprise zone (CGS 12-217) programs.

Under the act, a business cannot count as a new employee someone who:

1. owns the business or is a member or partner in it,

2. worked in Connecticut for a related business during the previous 12 months, or

3. no longer works for the business at the end of its income year.

The business must claim the credit for the income year in which it created the job and hired a new employee to fill it. It may also claim the credit for each of the two subsequent years if the employee held the job for the full year. Unused credits expire and cannot be refunded.

To claim the credits, businesses must apply to the DECD commissioner for a certification letter. The business must use a DECD form and provide enough information for DECD to determine its eligibility. The information must describe the business' activities, indicate its North American Industrial Classification System code, specify the number of people employed as of the application date, and identify the new hire's name and job title or classification.

The commissioner must act on the application within 30 days of receiving it. She must issue the certification letter if she approves the application. In doing so, she must state that the business may claim the credit if it meets the act's requirements. The commissioner must annually give the DRS commissioner a list of the businesses that she approved for credits and the credit amounts.

If the business is an S corporation or partnership, the credit may be claimed by its shareholders or partners. If the business is a single-member limited liability company that is disregarded as an entity separate from its owner, only the owner may claim the credit.

VOCATIONAL REHABILITATION JOB CREATION TAX CREDIT

PA 10-75, as amended by PA 10-1 18, JSS, authorizes insurance premium, corporation business, and personal income tax credits for businesses hiring Connecticut residents receiving vocational rehabilitation services from the Department of Social Services' Bureau of Rehabilitation Services (BRS) or the Board of Education and Services for the Blind (BESB). The program contains terms and conditions similar to those governing the small business job creation credit also authorized by PA 10-75. A business cannot apply the credit against its payroll withholding taxes.

PA 10-75, as amended, authorizes three-year credits for businesses that hire people who meet the act's criteria. The credit is $200 per month for each new employee. Businesses claiming the tax credits for hiring new employees cannot count these employees toward other credits the law allows. These credits include those authorized under the job incentive and the enterprise zone (CGS 12-217) programs.

The business qualifies for credits only for employees hired after May 6, 2010 for the income years beginning on or after January 1, 2010. The employee must work at least 20 hours per week for at least 48 weeks per calendar year.

A business cannot count as a new employee someone who:

1. owns the business or is a member or partner in it,

2. receives vocational rehabilitation services from BRS or BESB and who worked in Connecticut for a related business during the previous 12 months, or

3. no longer works for the business at the end of its income year.

The application requirements and process is the same as the one for accessing the small business job creation tax credits. So is the requirement regarding reports to the revenue services commissioner.

The business must claim the credit for the income year in which it created the job and hired a new employee to fill it. It may claim the credit for each of the two subsequent years if the employee held the job for the full year. Unused credits expire and cannot be refunded.

As with the small business tax credit, shareholders and partners of S corporations and partnerships can claim the credit against the personal income tax. With respect to single-member limited liability companies that are disregarded as entities separate from their owners, only the company's owner may claim the credit.

COMPARISON OF JOB CREATION TAX CREDIT PROGRAMS

TABLE 1: Compares Major Components of the Three Tax Credit Programs

Program Component

Jobs Creation Tax Credit (CGS 12-217ii)

Small Business Job Creation Tax Credit (PA 10-75 8 & 10)

Vocational Rehabilitation Job Creation Tax Credit (PA 10-75 9 & 10) as amended by PA 10-1, JSS Tax Credit Program Comparison's

Basic business eligibility requirements

Companies that create at least 10 new full-time jobs in Connecticut. DECD commissioner must conclude that the proposed increase in jobs (1) is not economically viable without the credit and (2) provides a net benefit to economic development and employment in the state.

Small businesses (fewer than 50 employees) that create new full-time jobs in Connecticut after May 6, 2010 during income years beginning on or after January 1, 2010, and prior to January 1, 2013. Hired employees must be Connecticut residents.

Businesses that create new full-time jobs in Connecticut after May 6, 2010 during income years beginning on or after January 1, 2010. Hired employees must be Connecticut residents receiving vocational rehabilitation services from the Department of Social Services' BRS or BESB.

Employee hour requirements

At least 35 hours per week (excluding temporary or seasonal jobs)

At least 35 hours per week for at least 48 weeks per calendar year (excluding temporary or seasonal jobs)

At least 20 hours per week for at least 48 weeks per calendar year

Further employee requirements for credit eligibility

New employees must not have worked in Connecticut for a related business during the previous 12 months

New employees:

1. must not own the business or be a member or partner in it,

2. must not have worked in Connecticut for a related business during the previous 12 months, and

3. must be employed for the business at the end of its income year

Applicable Taxes

Insurance premium, corporation business, and utility company tax

Insurance premium, corporation business, or personal income tax

Credit amount

60% of state income tax withheld from new employees' wages for up to five consecutive years

Three-year credit of $200 per month per new employee

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