For years, small businesses in Connecticut have called for state legislators to allow their companies to be eligible for state tax credits for research and development.
And for years they have left the Capitol with that request unfulfilled.
But the topic is receiving renewed attention this legislative session, as lawmakers, the Lamont administration, and state industry groups rally behind the governor’s budget proposal, which would expand the state’s R&D tax credit to small businesses, limited liability partnerships and other privately-held companies.
On Thursday, lawmakers in the Commerce Committee will vote on House Bill 5319, a key test of how the latest push to extend R&D tax breaks to more businesses will fare this year.
The proposal, which is also included in the governor’s budget bill, Senate Bill 84, would expand Connecticut’s current R&D tax credits to businesses bringing in less than $70 million in gross income annually. The state would create a tax credit voucher program that companies could claim starting with the 2026 tax year. If their request for the voucher is accepted, eligible companies would then be able to claim a credit equal to 6% of their research and development expenses that year.
“You cannot do manufacturing without research and development,” Anthony Benoit, the director of the Eastern Advanced Manufacturing Alliance Regional Sector Partnership, said at a Tuesday public hearing on H.B. 5319. “This small subsidy to small businesses to improve research and development makes companies more competitive.”
Companies would not be able to claim more than $1.5 million in a given year, and the tax credit program would be capped at $25 million annually. If a company’s tax liability is less than what they would receive under the credit program, a portion of the leftover credit can be claimed as a refund, enabling companies to use the money for additional investment.
Supporters say the credit voucher program, which would be overseen by the Department of Economic and Community Development, would be valuable for Connecticut’s small businesses. These businesses, often referred to as pass-through entities for tax purposes, do not pay corporate taxes, instead passing tax liability directly to the owner (or owners) of the company, who can then list business expenses on their personal income taxes. Companies can also elect to pay Connecticut’s pass-through entity tax, offsetting the taxes paid with a credit on their personal tax returns.
Because pass-through entities pay a different tax, these small businesses are ineligible for the state’s current R&D tax credit, which offsets a percentage of company research and development expenses listed on corporate taxes.
Updating the state’s R&D tax credit policy to include small businesses “would help broaden the state’s innovation pipeline, attract and retain entrepreneurs, and stimulate private-sector investment that yields long-term productivity gains and higher-value economic activity,” DECD Commissioner Dan O’Keefe noted in written testimony supporting the bill.
The lack of access to R&D credits has frustrated small business owners in the state, who say they’re being penalized for their size, and are unable to take advantage of the additional support Connecticut puts toward research and development.
And for industry groups, the difference has created a divide between small businesses and larger companies, potentially stifling innovation at a time where Connecticut is looking to become a national leader in fields like biotechnology, advanced manufacturing and quantum computing.
“Any time that we don’t have this type of incentive for businesses to do this type of activity here, you run the risk of them doing it in a more cost-effective state,” said Chris Davis, vice president of public policy for the Connecticut Business and Industry Association, a longtime proponent of the tax credit expansion. “And ‘cost-effective’ could mean a state that actually offers this type of tax credit to pass-through entities or to a lower cost environment.”
Connecticut’s growing industries look for more resources
Supporters of the tax change say an expanded R&D credit would be especially helpful for early-stage companies operating in some of Connecticut’s most prominent industries, including advanced manufacturing and financial technology.
The state’s growing biotech industry has also pushed for the credits, saying that the research and development support would be valuable for companies that are still getting off of the ground and have not grown enough to be eligible for the current credit.
“Connecticut is primarily a startup state, but the ecosystem gets built around the larger companies,” said Jodie Gillon, the president and CEO of BioCT, a statewide industry group for the life sciences. “We just want to make sure that, as our companies are evolving, they keep their footprint in Connecticut.”
Biotechnology has drawn growing interest in the state as new companies develop, often near the state’s colleges and universities. According to AdvanceCT, more than 24,000 people in the state are employed in the life sciences, contributing some $7 billion to the state’s GDP through pharmaceutical companies, medical device production, academic research initiatives and product development.
But many of these companies are small, relying on federal funding, going public or acquisition by a larger company to make enough money to operate.
For BioCT, expanding the tax credit would make it easier for these companies to invest in new technologies and innovations. Gillon says this goal closely aligns with the state’s innovation efforts, noting that in recent months Gov. Ned Lamont and DECD have backed millions of new investment into quantum computing and a growing life sciences hub in New Haven, including a $50.5 million award from DECD’s Innovation Clusters program last year.
The credit could also help the industry as it navigates a shifting federal policy landscape. The Trump administration has cut millions from the federal research budget, making funding uncertain for various biotech initiatives in Connecticut. Tax credits could help companies find more steady footing.
State officials say additional R&D investments could also help Connecticut stay competitive with nearby states that have made significant R&D investments, including New York and Massachusetts.
Despite support, the bill has stumbled in the past
The R&D bill has broad support in the legislature this year, with the Lamont administration, Commerce Committee leadership, and local business and industry groups all backing the proposal.
Commerce co-Chair Rep. Stephen Meskers, D-Greenwich, said that as the bill works its way through the committee, one thing he is thinking about is whether the credit will create new business activity in the state or if the credit will be used to support already existing activity.
“That’s always the question with investment in tax policy: how much steering you want to be involved in,” he said. “Certainly in competitive industries, you’re trying to drive interest and investment in your state to create a nexus for different types of industry.”
While the federal government’s R&D tax credit has been fairly popular, some policy groups argue that it is not structured in a way that can support the level of investment the U.S. needs to be globally competitive. And research on state R&D tax credits has been somewhat mixed; as states step in with their own credit programs to attract companies, they have adopted a range of policies, with little consistency among them.
“There’s no clear cut answer about whether or not these programs are effective,” said Alison Wakefield, an officer with the Pew Charitable Trusts, a national public policy and research organization. Wakefield has researched state R&D tax credits and other state tax incentives over the years, but says it remains unclear whether state incentives have encouraged a wave of new initiatives locally, or if already planned projects are simply moving across state lines.
Wakefield has helped states create evaluation processes to determine if their tax credit programs are actually working. While she declined to speak about the current Connecticut legislation, she did note that well-thought-out state programs are often targeted towards specific industries, and are designed to produce specific outcomes at the state level. Smart R&D programs also have a financial cap to protect state spending.
The R&D credit expansion proposed this year does have many of those factors working in its favor. Like the state’s already existing R&D credits, the proposed small business tax credit voucher offers differing levels of reimbursement depending on the type of business applying. While a regular small business would be eligible to receive 65% of any leftover money as a refund after claiming the credit, biotechnology companies would be able to receive 90% in the hopes of spurring additional investment and development. The program is capped at $25 million annually, and supporters note that the bill deals with revenues subject to the state’s volatility cap, mitigating much of the measure’s impact on the General Fund.
But it is still unclear if this will be the year the expansion finally happens. Extending R&D tax credits to pass-through entities have been floated in the legislature for years. A similar proposal last year, House Bill 7008, cleared Commerce and the Finance, Revenue and Bonding committees, but did not receive a floor vote. In 2022, House Bill 5488 was introduced, but did not make it out of committee.
Supporters of the current proposal note that in past years, it was hard to estimate exactly how an expanded R&D credit would be used in Connecticut and how many companies would actually take advantage of it.
“It’s been kind of a difficult barrier for the legislature and the executive branch to say, ‘OK, we’re going to commit to this without really knowing how big of a hit it could be to the state’s bottom line if we were to go forward with this,’” Davis said.
‘We need help’
At the public hearing this week for H.B. 5319, industry advocates and business owners argued that the credit would help boost the state’s economy by providing additional support to the thousands of small businesses that drive innovation in Connecticut.
“This bill makes a vital step in allowing qualified biotech businesses to apply for the credit,” said Jenna Grasso, CBIA’s policy director for bioscience growth and state spending. “It translates into millions of dollars that can be directly reinvested into further research, hiring new talent and further exploration within the sector.”
Manufacturers also voiced support, explaining that the bill — while ultimately a fairly modest credit — could help with cash flow, offset financial risks tied to innovation, encourage investment in new technology, and accelerate hiring of skilled workers.
“This proposal is not about large multinational corporations,” Joseph Carlone, Jr., president and CEO of Linemaster Switch Corporation, explained in written testimony. “It is about leveling the playing field for small and mid-sized Connecticut businesses that are already investing in innovation, workforce development, and advanced manufacturing.”
John Dellalana, president of Rowley Spring and Stamping, said that the credit would be transformative for his Bristol-based company as it navigates Connecticut’s high energy costs and payroll-related expenses.
“We have been crushed by energy prices and medical insurance. Our utilities are about $300,000 per year,” he explained in written testimony. “We need help.”
State legislators on the Commerce Committee say that in the coming weeks, and after years of previous attempts, they hope to be able to finally provide that support.
“This has been a proposal for this committee for a number of years,” said committee co-Chair Sen. Joan Hartley, D-Waterbury. “We are not abandoning it because we do believe in it firmly.”
