‘Productivity Tax’ Resurfaces in Budget Bill

The state budget implementer bill approved by the General Assembly May 2 includes a provision that could lead to an unprecedented tax on employers for productivity gains.

SB 1 features language from another bill, SB 515, that imposed a new “workforce and productivity gap surcharge”

That bill stalled in the Senate after clearing the Finance, Revenue, and Bonding Committee on a 34-20 vote earlier in the session.

SB 1 directs the Office of Policy and Management to develop a formula to identify so-called “productivity gaps,” generally defined as situations where revenue remains stable or increases while payroll or workforce levels decline.

OPM must submit a plan to the legislature by Jan. 1, 2027 that ensures technological advancements increase worker capability rather than displace employees, and that productivity gains result in a more skilled workforce.  

While CBIA strongly supports workforce development, training, and the responsible use of technology, SB 1’s framework takes a fundamentally punitive approach—treating productivity improvements as something to be recaptured or penalized rather than encouraged. 

‘Productivity Gap’ Surcharge 

At the core of the required plan is the creation of a “workforce and productivity gap contribution” from employers.

The bill directs OPM to develop a formula to annually assess a surcharge on employers that maintain a “productivity gap,” defined as a measurable increase in revenue per employee hour that occurs when payroll is materially reduced while gross revenue remains stable or increases.  

The bill further requires that the surcharge reflect the financial difference between an employer’s historical productivity and its reduced payroll expenses, and that efficiency gains realized through employee displacement be “recaptured by the state on an ongoing basis.”  

The bill directs OPM to develop a formula to annually assess a surcharge on employers that maintain a “productivity gap.”

The plan must also establish new administrative procedures for reporting and collecting the surcharge using Connecticut-specific payroll and tax data, along with a dedicated account to fund retraining, technical education, and career transition programs for displaced workers.  

SB 1 also directs OPM to create an augmented productivity tax exemption plan, permanently exempting certain productivity gains from taxation when they result from “collaborative technology” used alongside a “stable workforce,” defined as maintaining at least 95% of historical headcount and payroll.

“Collaborative technology” is broadly defined to include hardware, software, or algorithmic systems, including artificial intelligence, that assist employees rather than replace them.  

These definitions leave enormous discretion to state agencies to determine when an employer is rewarded versus penalized—creating uncertainty for businesses making good-faith operational decisions in a tight labor market. 

Wrong Signal, Wrong Time 

CBIA’s Chris Davis warned the bill sends a damaging signal to employers struggling with workforce shortages and rising costs. 

“This policy treats productivity as a liability instead of an asset,” he said.

“Employers are struggling to fill tens of thousands of unfilled jobs, and rather than address critical economic challenges like Connecticut’s high cost of living and the workforce shortage, lawmakers are further burdening employers.

Another 2,100 people left Connecticut's labor force in February, further challenging employers trying to fill over 76,000 job openings. The population of those working or looking for work has declined by over 14,000 (-0.7%) over the past 12 months. 1/2 https://t.co/hW33S0M0VF

— CBIA (@CBIANews) April 27, 2026

“At a time when we should be encouraging investment, innovation, and efficiency, this bill threatens to punish companies for adapting to economic reality.” 

Davis noted that workforce upskilling, retraining, and adaptability to new technologies were critical priorities. However, taxing productivity was not the solution. 

“If policymakers want to support workers, the answer is expanding training pipelines, reducing barriers to investment, and partnering with employers—not penalizing them for becoming more productive,” he said.

“Connecticut’s economy depends on innovation, not suspicion of it.”  

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 For more information, contact CBIA’s Chris Davis (860.244.1931).