Finance Committee Drops Small Business Tax Relief Measure
The legislature’s Finance, Revenue, and Bonding Committee acted on a number of tax bills ahead of its April 20 deadline, with two critical small business measures meeting different fates.
The committee unanimously approved HB 6584, which levels the playing field for small businesses by expanding the research and development tax credit to pass-through entities.
However, the committee dropped a provision from Gov. Ned Lamont’s state budget plan that fully restored the pass-through entity tax credit to its original level.
That proposal would return $60 million to more than 123,000 Connecticut small businesses.
“These changes we are proposing will help small businesses in Connecticut save money, which they can use to reinvest back into their establishments to support their continued growth and the development of new jobs,” Lamont said at a January conference announcing the initiative.
“By making this change, we can provide confidence to businesses that they can receive the full benefit of this tax credit.”
CBIA’s Eric Gjede called the committee’s exclusion of the pass-through entity tax credit measure “a significant blow to small businesses, but not unexpected.”
“A number of Republican and Democratic committee members specifically highlighted the absence of this credit restoration as the reason they opposed the committee’s revenue package,” Gjede said.
The revised budget plan—SB 981—was approved 31-20, with Democrats Jill Barry (D-Glastonbury), Steve Meskers (D-Greenwich), and Kerry Wood (D-Rocky Hill) joining all Republican members in voting against it.
Gjede noted that legislative leaders and administration officials will negotiate numerous elements of the budget’s tax provisions, with additional revisions expected before the full legislature acts ahead of the June 7 adjournment.
Committee members approved a $300 million tax cut plan—representing the first state income tax reduction since the mid 1990s—while scaling back the administration’s original $500 million proposal.
The plan cuts the two lowest marginal income tax rates, dropping the 3% rate (applied to the first $10,000 for singles; $20,000 for couples) to 2%.
The 5% rate for the next $40,000 earned by singles ($80,000 for couples) drops to 4.75%, with no changes proposed for singles earning $200,000-plus (and couples with a combined income of $400,000 or more).
Lamont’s proposal to extend the “temporary” 10% corporation business tax surcharge for three additional years, to the 2023 through 2025 income years, was retained by the Finance Committee.
SB 981 also includes the following measures:
- Increases the earned income tax credit from 30.5% to 45% of the federal credit beginning with the 2023 tax year;
- Increases the corporation business tax credit for human capital investments from 5% to 10% (for most eligible investments) or 25% (for eligible childcare-related expenditures) and makes donations or capital contributions to nonprofits for acquiring, constructing, or improving childcare centers eligible for the credit (from 2024);
- Increases the film and digital media tax credit from 78% to 92% and requires production companies to report specified job creation data to the Department of Economic and Community Development (2024);
- Increases from 65% to 80% the amount of cash refund a biotechnology company that is a qualified small business may receive for R&D tax credits it cannot use; keeps the percentage at 65% for companies in other sectors;
- Exempts all job-related or personnel training services from sales and use tax;
- Increases the maximum tax credit allowed for each construction trade apprentice under the apprenticeship training tax credit program from $4,000 to $7,500.
The committee did not act on a number of bills that increased business taxes, including measures hiking income tax rates, imposing a capital gains tax surcharge, and adopting a statewide property tax.
Transform Connecticut Solutions
Gjede noted that extending the R&D tax credit to small businesses, restoring the pass-through entity tax credit, and lowering Connecticut’s high cost of living were featured in CBIA’s 2023 Transform Connecticut policy solutions.
Those policy recommendations—endorsed by a bipartisan group of lawmakers representing almost half the General Assembly—also included additional proposals endorsed by the Finance Committee.
The committee approved HB 6922, which extends the period that corporations may carry forward a net operating loss deduction for losses incurred in the 2015 income year or later from 20 to 30 years, on a 48-3 vote.
HB 6927, which allows certain corporations that own LLCs to claim the fixed capital investment tax credit for amounts the LLC invested in qualifying fixed capital, was approved unanimously.
The committee also unanimously passed HB 6925, which exempts children’s clothing and footwear, personal protective equipment, and job-related and personnel training services from state sales and use taxes.
CBIA proposed the provision that exempts all workforce training services, as current law imposes the sales tax on training directly related to an individual’s job while not on training indirectly related to employment.
Legislation allowing companies that offer qualified employee stock-sharing plans to claim a dollar-for-dollar deduction against the corporate tax surcharge also won unanimous committee approval.
SB 1239, introduced just the week before the committee’s deadline, was amended after business community advocates raised concerns as the bill also made the corporate tax surcharge permament.
If the corporate surcharge was eliminated in the future, companies could claim the same credit against the corporate or premium tax.
For more information, contact CBIA’s Eric Gjede (860.480.1784) | @egjede.
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