Governor Malloy Signs $40.1 Billion State Budget

05.06.2011
Issues & Policies

Governor Malloy this week signed into law a $40.1 billion, two-year state budget approved by both the Senate and House after lengthy debates.

The budget includes the state’s largest-ever tax increase of $2 billion in Fiscal Year 2012 and $1.8 billion in FY 13 and depends on $2 billion in state employee concessions still being negotiated. It also includes some agency consolidations and spending cuts.

First, the Senate approved the budget by a 19-17 vote as three Democrats joined Republicans in voting against the bill. Then the House approved it by 83-67, with 15 Democrats joining all of the Republicans in the chamber in voting against the budget.

Lawmakers approved the budget without knowing what state employee concessions will be agreed upon to fill the plan’s $2 billion hole. What is certain is that taxes of many kinds will rise significantly to take as much as $1.9 billion (including the hospital provider tax) out of the state’s economy.

As of Friday, union concessions had not yet been announced and the state was preparing to send layoff notices to as many as 4,000 state employees. 

Economic impact

Many of the tax changes, specifically the increase in the personal income tax, will impact businesses. 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 budget, the state’s income tax has a new top rate of 6.7% that would begin at lower income thresholds ($500,000 for joint filers).

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

To add to this burden, the new income tax rates are retroactive to Jan. 1, 2011.

More tax changes

Among the budget’s many provisions are those that:

  •  Increase the corporate income tax surcharge from 10% to 20% for income years 2012 and 2013 (the “throwback rule” was rejected)
  • Increase the sales tax to 6.35%, applicable to all taxable sales
  • Expand the list of services and items to which the sales tax will be applied
  • Reduce the residential property tax credit off the personal income tax from $500 to $300
  • Impose a two-year, $72 million tax on electric generators
  • Introduce an Amazon sales tax on online purchases shipped to Connecticut residents  
  • Create a 7% luxury tax, starting with the first dollar (on clothing costing more than $1,000, jewelry above $5,000, cars above $50,000 and boats above $100,000)
  • Reduce the estate tax exemption from $3.5 million to $2 million  
  • Change the cap on the insurance premium tax credit from 70% to 30%

In final negotiations, lawmakers rejected the proposed three-cent gasoline tax increase.

Spending changes 

The budget contains about $250 million more in spending than what the governor had proposed (much of it to obtain additional federal Medicaid reimbursement) but it 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 budget authorizes Office of Policy and Management Secretary Ben Barnes to cut $2 billion over two years from the budget, subject to legislative approval.

Revenues up

Meanwhile, the state comptroller says that state revenues have increased by $414.9 million since last month – raising expectations for a state fiscal year-end balance of $509.6 million.

With the tax increases, the new budget is projected to produce a nearly $1 billion cumulative surplus over the next two fiscal years. 

Economy check

At the same time, the state’s unemployment rate climbed back over 9% in March–above the national average of 8.8%–with the state's labor markets reporting a loss of 6,000 jobs.   

The 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.  

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

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