State lawmakers have moved along a proposal to expand access to research and development tax incentives for small businesses, an effort that has failed in previous legislative sessions.
A proposal included in Gov. Ned Lamont’s budget revenue bill, Senate Bill 84, would create a tax credit voucher program administered by the state Department of Economic and Community Development. It would allow qualifying small businesses to earn a tax credit equal to 6% of their R&D expenses, even if they do not yet have enough tax liability to benefit from existing credits.
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Under the proposal, eligible businesses would receive vouchers that could be applied to state taxes or potentially transferred, giving companies a way to monetize the benefit.
That feature is aimed at startups and growth-stage firms, including bioscience companies, that often operate at a loss while investing heavily in new technologies, products or processes.
The tax credit is capped at $1.5 million per business per year and sets a limit of $25 million overall each year.
The state already offers R&D tax credits, but critics say those incentives tend to favor larger, established companies with consistent profits. The bill seeks to level the playing field by making the credits more accessible to smaller firms, including S corporations and pass-through entities, which lawmakers say are a key driver of job creation and economic growth.
DECD would establish guidelines for the program, as well as review applications and issue the vouchers. Details, such as eligibility thresholds and administrative procedures, would be determined as part of the rollout.
In testimony submitted during a Finance, Revenue and Bonding Committee public hearing on the bill held on March 11, Christopher Davis, vice president of public policy for the Connecticut Business & Industry Association, strongly supported the bill, calling it a “critical modernization of Connecticut’s tax code that better reflects how today’s innovation-driven economy is structured.”
Davis provided an example of a company investing $2 million in R&D, which under the bill would qualify it for a $120,000 tax credit.
“For a small or mid-sized manufacturer, $120,000 is not insignificant,” he said.
Davis added that CBIA also appreciates the “fiscally responsible structure” of the proposal, which is estimated to have only approximately a $5 million impact on the state’s General Fund revenue, “with the remaining $20 million anticipated to reduce volatility cap transfers rather than ongoing operating revenue.”
That, he said, “supports innovation without undermining budget stability.”
Jim Gildea, chairman of the government affairs committee for ManufactureCT, an association of manufacturers in the state, also submitted testimony in favor of the proposal, calling it a critical issue.
“In a recent ManufactureCT survey,” he noted, “this was identified as one of the most pressing concerns facing our members.”
Gildea said it is “a clear inequity” that S corporations and pass-through entities are excluded from using R&D tax credits, because many would benefit the most from them.
“Without these incentives, smaller manufacturers are left at a structural disadvantage when attempting to invest in innovation,” he said.
The Finance, Revenue and Bonding Committee voted 35-17, mostly along party lines, to approve SB 34, with one legislator abstaining and one absent. While the Republicans mostly voted against the overall bill, many support the section extending the R&D tax credits to smaller businesses.
Rep. Joe Polletta (R-Watertown), a ranking member on the committee, said the R&D tax credit “may never make it past the finish line in the final product” of the governor’s revenue bill.
In response to a question from Hartford Business Journal, Committee Co-Chair Rep. Maria Horn (D-Salisbury) said the R&D tax credit proposal remains “very much still on the table.”
There is a separate bill, House Bill 5319, that specifically addresses the R&D tax credit voucher proposal. That bill was raised by the Commerce Committee, which unanimously voted to refer it to the Finance Committee, but it has yet to move further.
Timing is critical because the short legislative session is scheduled to end in a month, on May 6.
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