Lawmakers Push Capital Gains Hike, Other Tax Changes
The state’s business community is pushing back on bills creating a new payroll tax, changing municipal property taxation, and increasing the surcharge on certain capital gains.
Other business groups, including the National Federation of Independent Business, the Motor Transport Association of Connecticut, and the Insurance Association of Connecticut also spoke against one or more of the bills.
SB 1136 imposes a new 1.5% surcharge on any capital gains from the sale or exchange of capital assets by any taxpayer who pays the highest marginal income tax rate.
The fear, Gjede said, is that the bill may discourage residents from making investments that ultimately benefit the state’s economy.
Driving Away Investment
Capital gains are the profits investors earn from selling property or investments for a higher price than initially paid.
Those profits are taxed differently than income through the capital gains tax, which most states keep low to encourage participation in financial markets and provide businesses with access to investment capital.
If SB 1136 is enacted, Connecticut would have one of the highest capital gains taxes in the country—and be one of only two states that tax short-term capital gains at a rate higher than ordinary income.
And it would be the only state to tax long-term capital gains at a higher rate than ordinary income.
People who pay the highest income tax rates are able to move their business activity and themselves to states with friendlier tax policies, Gjede said.
But with a new surcharge on capital gains, investors are likely to invest elsewhere, or wait to sell their investment assets after they leave Connecticut.
State Income, Capital Gains Tax Rates
|Department||FY 2020 Overtime||FY 2019 Overtime||$ Difference||% Difference|
|Correction||$38.23 million||$38.2 million||$29,081||0.1%|
|Mental Health & Addiction Services||$28.64 million||$25.74 million||$2.9 million||11.3%|
|Developmental Services||$20 million||$20.14 million||($128,426)||-0.6%|
|Emergency Services & Public Protection||$18.93 million||$16.53 million||$2.4 million||14.5%|
|Children & Families||$10.9 million||$11.12 million||($188,685)||-1.7%|
Source: Tax Foundation
Property Tax Changes
SB 1139 changes municipal property taxation by repealing the current 70% assessment ratio for all properties, replacing it with a 100% assessment, and eliminating the property tax on motor vehicles.
The measure died when the committee failed to act on it.
Glede said that, on its face, SB 1139 treats residential and commercial property equally in terms of applying the new assessment rate.
But it also allows for a mitigation process that benefits only one property classification.
“The business community is concerned that this legislation ultimately shifts property tax burdens from residential properties onto businesses,” Gjede said.
“If enacted, it’s conceivable that rather than lowering the mill rate to keep the tax flat for all taxpayers, municipalities may elect to keep the current mill rates in place and only provide relief via tax credit to residential property owners.”
The result, Gjede said, is a separate effective tax rate based on property classification, which undermines the simplicity and equity of Connecticut’s property tax system.
“The reforms in SB 1139 do not help attract businesses to our state, particularly to our cities that critically need more commercial development,” he said.
Mandatory Payroll Tax
SB 1143 creates a mandatory employer compensation expense tax similar to the voluntary program New York state recently adopted to overcome the new federal caps on state and local tax deductions.
Gjede noted that the Internal Revenue Service is reviewing New York’s program and other states’ efforts to minimize the impact of the federal limits.
New York’s program shifts a portion of the employee tax burden to employers, who may be able to circumvent SALT deduction limitations through tax deductions for business tax purposes.
The employee has wages reduced and theoretically is made whole via a tax refund at the end of the year.
While in a perfect world the idea makes sense, it still creates a host of unanswered questions for employers and employees, Gjede said.
For example, it impacts employees living paycheck to paycheck and is silent about employees who work in Connecticut but live in other states.
Gjede urged lawmakers to reject all three bills.
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