Governor Malloy and Democratic state lawmakers last week agreed on a $40.5 billion, two-year state budget that could come to a vote in the legislature at any time. The budget would close Connecticut’s projected $3.2 billion deficit with a combination of spending cuts, tax increases and state employee concessions.

Specifically, the tax proposal (SB 1007) increases taxes by at least $1.411 billion ($1.9 billion including the proposed hospital provider tax). The spending proposal (HB 6380) trims state spending by about $750 million but assumes $2 billion in state employee concessions being negotiated by Governor Malloy.

Many of the tax changes would impact Connecticut businesses, specifically the increase in the personal income tax. In Connecticut, small businesses that are formed as S corporations, limited liability companies or other similar structures pay tax on their business income under the personal income tax, not the corporate income tax.

Under the new proposal, the income tax would have a new top rate of 6.7% that would begin at lower income thresholds ($500,000 for joint filers).

Significantly, for taxpayers with incomes exceeding $700,000 for joint filers, lower marginal rates will not apply and taxpayers will be paying the higher rate from dollar one. What’s more, the current top rate of 6.5% will trigger at $400,000.  

More tax changes

Among the many other changes in the Democrats’ tax proposal (SB 1007), it:

  • Eliminates the proposed “throwback” tax that would have impacted Connecticut manufacturers and businesses that export goods and services.
  • Increases the corporate income tax surcharge from 10% to 20% for income years 2012 and 2013
  • Increases the electric generation tax proposed by the governor from $58 million to $72 million, although it is to be sunsetted after two years.
  • Increases the personal income tax to a new maximum rate of 6.7% for joint filers over $500,000. (Significantly, for taxpayers with incomes exceeding $700,000 for joint filers, lower marginal rates will not apply and taxpayers will be paying the higher rate from dollar one.)
  • Increases the state’s sales tax to 6.35%, applicable to all taxable sales.
  • Imposes a new, “Amazon” sales tax on website purchases shipped to Connecticut residents if the Internet sellers have marketing affiliates located within the state.
  • Increases the luxury tax to 7% and is added starting with the first dollar
  • Reduces the property tax credit on residential homes off the personal income tax from $500 to $300
  • Reduces the estate tax exemption from $3.5 million to $2 million. 

More information about the tax package:

Spending changes

In February, Governor Malloy proposed to cut state spending by about $750 million through agency consolidations and other efficiencies, such as by starting to make inroads to change the state’s long-term healthcare and corrections systems.

The legislative spending proposal (HB 6380) contains about $250 million more in spending than what the governor had proposed, much of it to obtain additional federal Medicaid reimbursement, but offsets the increase with other reductions. Overall, lawmakers trimmed some state employee positions and expenses but added back some programs the governor had slated for cutting.

If the state employee union concessions cannot be reached, the new proposal authorizes Office of Policy and Management Secretary Ben Barnes to cut $1 billion from the budget.

There are many additional ways to cut state spending—put forth by the bipartisan Commission on Enhancing Agency Outcomes, Connecticut Regional Institute for the 21st Century and others—that would reduce the need to increase the state tax burden.

Because of Connecticut’s severe long-term liabilities, the state needs to make systemic changes that impact not only current costs but the future obligations.

A better budget

Serving as a backdrop to the budget negotiations is Connecticut’s struggling economy. The state’s unemployment rate climbed back to over 9% in March and above the national average of 8.8%, with the state's labor markets reporting a loss of 6,000 jobs.   

The financial impact of the recession continues to be felt sharply by Connecticut employers who are already facing at least $70 million in new unemployment compensation taxes and possibly more.  

CBIA urges state political leaders to put aside their differences and work together to cut spending further in order to reduce the increased tax burden on Connecticut residents and businesses.

A better budget will restore business confidence, create jobs and ensure a brighter future for everyone.

For more information, contact CBIA’s Bonnie Stewart at 860.244.1925 or bonnie.stewart@cbia.com.