The Connecticut General Assembly approved a $46.4 billion, two-year state budget with strong bipartisan support on the final day of the 2021 legislative session.
The budget, which avoids broad-based tax hikes, passed the state House 116-31 and the Senate 31-4, with many Republican lawmakers joining the Democratic majorities in support.
State spending will rise 2.6% in fiscal 2022 and 3.9% the following year, with major investments in municipal aid, education, nonprofit providers, and workforce development.
Lawmakers left the state's record $3.5 billion rainy day fund untouched, leveraging $1.75 billion in federal COVID-19 relief funds while depositing surplus dollars from the current year in the underfunded state employee pension system.
CBIA president and CEO Chris DiPentima praised Gov. Ned Lamont and legislators from both sides of the aisle who resisted proposals for more than a $1 billion in tax hikes.
“We’ll finish this year with a $500 million surplus, a record rainy day fund, and billions in federal relief dollars,” he said. “We’re grateful that so many policymakers recognized that and resisted proposals that would undermine our economic recovery.
“From a state budget with no broad-based tax hikes, to significant targeted investments in our cities, workforce development, and childcare, to historic unemployment reforms—this session sets the course for the state’s recovery.
“Overall, there are numerous reasons to be optimistic about the state’s future based on the actions the legislature and the Lamont administration took over the last five-plus months and the broad range of favorable economic news that is shifting the wind to our backs.”
DiPentima said the session addressed most of the organization’s Rebuilding Connecticut policy priorities, designed as a roadmap for job creation and economic growth, and he thanked the bipartisan group of 55 state lawmakers who signed the policy pledge for following through with their support.
“We called for a change in thinking before the session began, for real collaboration and bipartisanship, so we can capitalize on the state’s many strengths and not only restore our economy, but make it more robust than ever," he said.
“We’re grateful for the level of bipartisanship within the legislature this year, for the willingness to collaborate with the business community and other groups, and for the readiness of key legislative voices to speak out on critical economic and fiscal issues."
DiPentima acknowledged that employers were disappointed lawmakers elected to maintain the temporary 10% corporate tax surcharge, delay repeal of the capital base tax, retain the sales tax on personal protective equipment and training, and not restore the pass-through entity tax credit.
“We cannot lose sight of what’s important. We must continue the fiscal discipline of recent years that has seen revenue growth, a healthy rainy day fund, and recognition from Wall Street through upgrades to the state’s credit rating," he said.
“We must continue to fuel economic growth through policies that nurture businesses and the opportunities they create for our communities and all of our residents, as the pandemic highlighted.
“And let’s make sure we continue attracting residents and businesses to the state, taking full advantage of the competitive advantages New York and Massachusetts are giving us through their tax policies.”
- No “consumption” tax. This proposed tax hike was not actually tied to any consumption and in reality, was simply a surcharge on personal income tax. It would have generated between $500-800 million per year in new revenue.
- No digital ad tax. Aimed at media advertising platforms, this tax would have generated an estimated $150-175 million per year, all of which would have been passed down to the many businesses advertising online.
- No increase in the capital gains tax. The Finance Committee proposed a 2% surcharge on capital gains that would result in an additional $262 million in revenue per year. The governor was steadfast against this proposal from the opening day of the session.
- The R&D tax credit is restored to 70%. This will be done in two stages, beginning in fiscal 2022. It should be noted, however, that the carry forward of new R&D tax credits will be limited to 15 years.
- The corporate surcharge will remain temporary and extend to 2022. While this “temporary” tax may never go away, pushing the sunset date out, rather than make it permanent as initially proposed, prevents it from being added to the liabilities side of various filings made by publicly traded companies.
- The phase-out of the capital base tax will be delayed until 2024. The capital base tax was set to begin phasing out this year. However, pushing the sunset date out a few years generates about $90 million for the state over a three year period.
- No Transportation Climate Initiative tax/revenue. The multistate agreement would generate about $100 million in revenue from fuel wholesalers, ultimately getting passed down to consumers at the gas pump.
- No health insurance assessment. The HIT tax was to be levied against our state’s health insurers in effort to provide additional health insurance subsidies for certain segments of our state’s population. The problem, however, is that the assessment would ultimately be passed down to small businesses in the form of higher premiums.
- No payroll tax. The $50 million per year that would have been generated for the state as a result of keeping a portion of a voluntary employee income reduction that would have been offset by tax credits was not worth the administrative headaches it would have created for businesses.
- No highway use tax—a $90 million per year tax on large tractor trailers did not make the budget. However, the legislature approved it as a stand alone measure.
Other items of note:
- There will be a tax amnesty period extending from Nov. 1, 2021 to Jan. 31, 2022 that will waive penalties for late payments and reducing interest by 75%
- There will be a new convenience fee imposed on payments made to the state using credit cards
Unemployment Fund, Workforce Development
The budget also allocates $155 million to help address the state's unemployment fund debt crisis. Employers are responsible for repaying the expected $1 billion in federal loans the state took to cover historic unemployment claims.
CBIA led small business efforts calling for the state to leverage federal COVID-19 relief funds to alleviate the burden on employers, with that debt threatening Connecticut's post-pandemic economic recovery.
The budget includes critical workforce development initiatives:
- $250,000 per year for the Office of Workforce Strategy
- $300,000 for the Office of Public Health and Pandemic Preparedness
- $171 million for the Connecticut Technical Education and Career System to separate from the state Department of Education
- $8.8 million for childcare subsidies using federal funds
- $14 million in fiscal 2022 and $15 million in fiscal 2023 for debt free community college
- Approximately $105 million annually to nonprofit providers
- An increase by more than $120 million annually in municipal funding
- $140 million in Education Cost Sharing grants to local school districts
The legislative session also included a number of other changes to tax law and policy of importance to the business community.
One additional key change passed early in the session related to the taxation of employees who formerly commuted, but now telecommute, to an out-of-state workplace.
HB 6516 prohibits the state’s Department of Revenue Services from establishing a nexus, and thereby attempting to tax the income during the 2020 tax year, of any Connecticut resident that began to telecommute to an out of state job due to the pandemic.
Under the “convenience of the employer” rule, employees typically pay taxes in the state their employer is located, and then receive a corresponding credit for any Connecticut tax obligations.
HB 6516 allowed those employers who no longer commuted across state lines to continue to receive that credit.
Given that the bill only applied to the 2020 tax year, employees that continue to telecommute rather than commute across the border will be subject to Connecticut taxation in the coming year.