Connecticut Offers Longer Tax Window for Losses to Lure Biotech

Connecticut hopes to attract new bioscience startups with a recent corporate income tax change giving businesses more time to deduct past losses from future profits.

Businesses will have an extra decade to carry net operating losses into future years for the purpose of reducing their state tax liabilities, under a measure signed by Gov. Ned Lamont (D). Starting next January, Connecticut’s carryforward window is 30 years, significantly more generous than the 20-year period in neighboring Massachusetts and New York, two major destinations for the life sciences industry.

The update was aimed at bioscience firms and other startups that typically rely on seed money to get started and incur losses until their technology or medicine catches on, said Chris Davis, vice president of public policy at the business organization CBIA, which pushed for the changes. He said the change could help keep companies that spin out of Yale University or the University of Connecticut within state lines. Connecticut’s bioscience industry employed nearly 26,000 people as of 2022, according to the business group.

“This was one way to make it so that businesses that are looking to locate here, especially when they can choose to do it in New York and Boston, it makes it that much more competitive to be located in Connecticut to start,” Davis said.

Massachusetts is one of the largest US hubs for bioscience industries, employing more than 110,000 people in biotechnology, pharmaceuticals, and other research and development fields. Life sciences companies in the state raked in 32% of all venture capital dollars nationwide in 2023, according to MassBio, an industry trade group.

New York City, where pharmaceutical giant Pfizer Inc. is headquartered, is another top destination for the industry, and lawmakers there last year revived a tax incentiveto expand its $5.3 billion biotech industry, which employs roughly 20,000 people.

Longer carryforward windows are meant to make the tax code fairer for companies that experience boom-and-bust cycles of economic growth by taxing them on their average profitability over time. Since the 2017 federal tax law, companies can carry past or current losses forward indefinitely to offset their future tax liability, although the loss can’t reduce that liability by more than 80%. The District of Columbia and 19 states conform to the federal rules to determine state business tax liability.

But such provisions have faced criticism for their role in reducing the overall corporate tax base, and many states limit how long losses can be deducted. Connecticut expects its 30-year carryforward will cost it $4.7 million annually starting in 2047.

Most states use the 20-year carryforward period the federal government used before the 2017 tax law. Five states permit losses to be carried forward for up to 15 years. Rhode Island is the most restrictive, setting the window to only five years.

Some states restrict how much corporations can offset their tax liability in a given year using NOL deductions. Pennsylvania caps it at 40% of current-year taxable income, though some lawmakers are pushing a bill that would raise the threshold to 80%. Connecticut allows annual offsets of 50%.

Connecticut’s 30-year carryforward is “among the most generous” recent NOL changes enacted by states, said Lucy Dadayan, a principal research associate at the Urban-Brookings Tax Policy Center. Last year, Illinois adopted a law extending its window to 20 years from 12, and Utah began allowing unlimited carryforwards of NOLs from tax years 2008 and beyond.

While NOL provisions are “not the most important factor” for companies deciding where to locate, they still play a “significant role,” said Andrey Yushkov, a senior policy analyst for the Washington-based Tax Foundation.

“It can increase your state tax competitiveness without tremendous and severe political consequences,” Yushkov said, adding that Connecticut will be a “leader” compared with other states in the Northeast.

Still, Dadayan said she didn’t think Connecticut’s move would make a “big difference,” outside of sending a message that the state is “becoming a more business-friendly environment.” For tax purposes, the jump to 30 years from 20 isn’t as consequential as moving up from 5 years or 12 years, she said.

“At the end of the day, this is not going to play a significant role for businesses to decide whether to invest their business or locate to Connecticut or not,” she said. “There are so many factors that come into play.”