How Proposed Tax Increases Will Affect Businesses

Issues & Policies

Many of the tax increase proposals included in Governor Malloy’s $1.5 billion tax plan to help close a $3.5 billion budget gap in the next fiscal year will impact Connecticut businesses.

Among the tax changes affecting businesses:

  • Two-year extension of the 10% corporate income tax surcharge
  • Increase in the personal income tax (most small businesses—S corporations, LLCs, etc.— pay tax on their business income through the personal income tax)
  • Increase in the sales tax, and the removal of many sales-tax exemptions 
  • A throwback rule that will affect in-state manufacturers
  • Increase in the premium tax on insurers
  • <li> A new tax on electricity generation

In addition, the governor proposes to lower the taxable estate threshold from $3.5 million to $2 million, and eliminate the $500 property tax credit off the personal income tax.

Also included are increases in the gasoline tax, cigarette tax and alcoholic beverage tax.

New income tax rates

The governor has proposed adding several new brackets to Connecticut’s personal income tax rate schedule. The current rate is 5% on most income under $1 million. The proposal calls for a progressive rate structure with new rates ranging from 5.5% to 6.5% on incomes between $100,000 and $999,999 for joint filers. For incomes over $1 million, the rate is proposed to go from 6.5% to 6.7% for joint filers.

Under Connecticut’s tax laws, 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 in income tax, so these new rates are troubling for small businesses.

The governor intends to offer an earned-income tax credit for the state's poorest wage earners, based on the federal tax credit. 

Sales tax increases

The proposal raises the state sales tax from 6% to 6.25%. However, for purchases of taxable goods and services at retail establishments, the rate is proposed to be 6.35%, with the additional .1% to be returned to the municipality where the purchase was made. The proposal also increases the hotel tax to 14%, calls for a new 3% surcharge on luxury goods over a certain amount, and taxes many products and services, such as clothing under $50, hazardous waste removal, car washes, boat services, non-prescription drugs and cosmetic surgery and several others.

Manufacturers’ tax

The throwback rule proposed by the governor will affect in-state manufacturers. Under this rule, sales by Connecticut manufacturers into states that do not have a corporate income tax are added back into the company’s Connecticut tax calculations. It is estimated that it will cost these Connecticut-based manufacturing companies approximately $20 million a year.

Energy tax

Governor Malloy wants to lower energy costs for businesses and residents in Connecticut, proposing that any surplus the budget achieves this year be used to reduce the additional charges that many ratepayers are paying this year to make state fiscal ends meet. At the same time, however, he is proposing to increase the tax on electricity generation by two-tenths on one cent per kilowatt hour.

Jobs incentive

There are some tax credit ideas in the plan. The governor included a proposal to reward the first five businesses that bring at least 200 jobs to Connecticut with a package that combines “our best job creation tools” — the Reinvestment Tax Credit, the Manufacturing Assistance Act and the Job Creation Tax Credit.

In addition, the governor proposes to increase, from 70% to 100%, the maximum amount of corporate tax liability that can be erased with job creation credits.The increase would be granted in $6,000 increments for every net new job created.

Economic projections

The governors’ budget proposal is based on a 4.8% growth in personal income in FY2012 and a 6.4% increase in FY2013. It also assumes Connecticut begins FY2012 with an 8.9% unemployment rate that declines to 6.8% at the end of FY2013. These are aggressive projections, but not improbable, says CBIA economist Pete Gioia.

Next steps

The governor’s plan now goes to the legislature. Its first stop is to the Appropriations Committee on the spending side and the Finance Committee on the tax and capital spending side. Both committees will soon hold public hearings.

State lawmakers should continue to find ways to cut state spending to reduce the need for tax increases and boost prospects for a renewal of economic growth. 

For more information about the governor’s tax proposal, contact CBIA’s Bonnie Stewart at 860.244.1925 or


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