The state legislature's Finance, Revenue, and Bonding Committee narrowly approved more than $1 billion in tax hikes April 22, drawing immediate criticism from the Lamont administration, moderate Democrats, Republicans, and the state's business community.

The committee amended Gov. Ned Lamont's original budget proposal, which included no broad-based tax hikes, adding annual state tax hikes of about $600 million over the next two years.

The tax plan also diverts more than $1 billion in revenues outside the statutory spending cap while tapping over $2 billion from one-time sources.

The committee approved HB 6443 on a 26-22 vote, with Democrats Jill Barry (D-Glastonbury), Stephen Meskers (D-Greenwich), Chris Perone (D-Norwalk), Kerry Wood (D-Rocky Hill), and Chris Ziogas (D-Bristol) joining all Republicans present in opposing the measure.

The bill includes a new personal income tax surcharge—starting at 0.7% for taxpayers earning over $500,000 and scaling up to 1.5%—that will negatively impact the majority of Connecticut small businesses structured as pass-through entities.

In addition, a new 2% capital gains surcharge raises the total tax rate to 8.99% and erases a critical state incentive for attracting and retaining residents—including those fleeing tax hikes in neighboring states.

Increases Business Costs

And by making the "temporary" 10% corporate surcharge permanent, adding a highway use tax on trucks, and imposing a new digital advertising tax, the committee's plan further increases the already high cost of doing business in Connecticut.

On a positive note, the bill does restore the R&D tax credit to 70% (it was cut to 50% several budget cycles ago) and allows bars, hotels, and restaurants to retain one percentage point of the 7.35% state sales tax on food and beverages for one year. Lawmakers imposed a 1% sales tax surcharge on restaurant meals in 2019.

"The bills are doing a lot of spending outside the cap—sort of the same games that got us in trouble over the last 30 years."

Gov. Ned Lamont

Lamont told reporters the tax hike package was "not something that I would sign."

“For the first time in many years, Connecticut’s got really good momentum, and that’s in terms of GDP and employment and new businesses and people moving to the state of Connecticut," he said. "I think part of that is people have recognized we’re beginning to get our fiscal house in order.

"The bills I saw on the spending side are doing a lot of spending outside the spending cap—sort of the same games that got us in trouble over the last 30 years. To respond to that by just more taxes is not the way I think we should be going as a state."

Small Business Impact

CBIA president and CEO Chris DiPentima called the more than $1 billion in tax hikes "precisely the wrong prescription for Connecticut’s fragile economic recovery.”

“Small businesses will bear the brunt of many of these tax increases and it defies sensible logic that there are lawmakers who think further burdening struggling smaller employers is a positive for the state," DiPentima said. 

“That’s the same illogical thinking that caused Connecticut to be near the bottom of the nation in recovery from the 2008-2009 recession—those who do not learn from history are doomed to repeat it.

“These tax hikes erode the opportunities the state has to rebound from the pandemic stronger and better than before, to change the state’s narrative, and reimagine a Connecticut that can compete regionally, nationally, and globally."

"Small businesses will bear the brunt of many of these tax increases and it defies sensible logic that there are lawmakers who think further burdens are a positive."

CBIA's Chris DiPentima

DiPentima said lawmakers do not need to raise taxes given the historically high balance of the state’s rainy day fund, this fiscal year’s budget surplus, and significant federal relief funds, as the governor and independent analysts have noted.

New York has already hiked taxes on its residents and Massachusetts looks set to follow," he said. "Why would we take away that competitive advantage, particularly when we have a healthy rainy day fund and significant federal relief funds?

“We are also concerned with the number of gimmicks in this bill that are designed to circumvent the state’s spending cap—that lack of fiscal discipline is what has fed a pattern of budget deficits and tax hikes over the last 10 years.

“We applaud those Republicans and Democrats who opposed the bill in committee and call on the administration and the legislature to work together to find solutions, not further erode our economic competitiveness.”

'Speechless'

Finance Committee co-chair Sean Scanlon (D-Branford), defended the tax plan, saying "I view this package as cutting more taxes than raising them."

“I think we had a unique challenge before us this year,” he said. “We tried to craft a package that both met the moment ... but also does not stifle the growth the Connecticut is experiencing."

Several committee Democrats criticized the tax plan, including Barry, who said she opposed the bill because it "is not sound financial policy."

Committee member Terrie Wood (R-Darien) said the tax hikes are “not respectful to the citizens of our state. It leaves me speechless to be honest.”

Spending Plan

The legislature's Appropriations Committee approved a $46 billion, two-year spending plan the day before the Finance Committee acted, leaving approximately 80% of the governor's proposed budged intact while increasing spending 1.8% in fiscal 2002 and 3.7% in fiscal 2023.

The committee's spending plan focuses on investments in higher education, social services, municipal aid, and education, with an interwoven theme and focus on COVID-19 recovery and support. Highlights:

  • Nonprofits receive increased funding o $50 million in fiscal 2021 and $30 million in 2022 and 2023 and FY23
  • $425,000 per year for administrative costs related to the development and implementation of the proposed expansion of state-run healthcare
  • Shifts the new chief workforce officer from the governor's office to the state Department of Economic and Community Development with $250,000 in funding
  • Implements debt free community college with $14 million in fiscal 2022 and $15 million in 2023
  • Provides additional funding to municipalities beyond the level in the governor’s proposal
  • Increases education aid by $108 million over the biennium and dedicates a portion of the sales tax to fund the increase in non-education aid
  • Allocates $300,000 annually to fund the new Office of Pandemic and Public Health Preparedness  

For more information on state tax policy, contact CBIA’s Eric Gjede (860.480.1784) | @egjede.

For more information on state spending, contact CBIA's Ashley Zane (860.244.1169) | @AshleyZane9.