State Budget and Taxes: New Gap Strains Budget, Deeper Deficit Looms

Confronted with a sharp decline in state revenues that threatened a deficit for fiscal year 2015, lawmakers approved a revised, $19 billion state budget in the last week of the session that technically is in balance.

The budget (HB 5596) increases spending by about 2.5% and relies on myriad fixes to erase the budget gap, including funds shifted from various state accounts into the General Fund, optimistic estimates of new revenue and state agency efficiencies, and the delay or avoidance of other spending obligations.

These one-time maneuvers ensure greater difficulty in crafting the next two-year state budget when lawmakers return in January, especially with projections indicating a $1.4 billion deficit ahead in fiscal year 2016—a funding gap of over 7%.

Lawmakers also increased state borrowing for a variety of projects and initiatives by approving a $953 million bonding package.  

Priorities

Among other things, the revised budget for fiscal year 2015 addresses such priorities as transportation, higher education, job training, manufacturing, and aid for municipalities.

On education, the budget provides $125.5 million for the Transform CSCU 2020 program to expand and strengthen the state’s university and community college system and includes funding for 35 more engineers in the state Department of Transportation to facilitate the state’s much-needed infrastructure projects. And the plan increases by $80 million funding for municipalities.

The budget also puts $38 million into the state’s Rainy Day Fund, which raises it to $309 million.

If Connecticut’s economy picks up steam, jobs rebound, and a solid housing recovery emerges, then the budget gaps likely close. If the state’s economy continues to struggle, however, so will the budget.

State Taxes: It’s Time for a Review

This year no major tax legislation was acted upon. This is because the legislature decided early on that a comprehensive review of the state and municipal tax structure needed to take place and n the meantime little else would be done. In the end they stuck to their original plan passing a measure that set up the framework for the tax study as well as adopting a few other changes to the tax credit and gift and estate tax statutes.

Tax Study

Especially in view of what some competitor states—including New York—have accomplished in changing their tax structures to boost economic development, policymakers agreed that the time has come for Connecticut to do the same.

In response, HB 5597 mandates a comprehensive look at our state and local tax structures. The chairs and ranking members of the legislature's Finance, Revenue and Bonding Committee will convene a panel of experts to conduct the study, which must be completed by January 1, 2016. The state has appropriated $500,000 for costs associated with this study.

Aerospace Industry

In a good illustration of how to put tax policy to work for Connecticut’s economy, lawmakers approved the Aerospace Reinvestment Act (HB 5465), which will solidify Connecticut’s position as a leader in aerospace research, development and manufacturing.

The legislation will enable the state’s largest manufacturer, United Technologies, to grow and expand in Connecticut, in the process also supporting thousands of smaller manufacturers that provide the company with products and services.

Apprenticeship and R&D Tax Credits

One of the biggest concerns of Connecticut manufacturers is the condition of the state’s pipeline of skilled talent—the problem is, manufacturers already are not finding enough qualified candidates to fill open positions.

The budget implementer (HB 5597) responds to this critical need by permitting pass-through entities (S corporations, LLCs, LLPs and sole proprietorships) to earn apprenticeship tax credits for income years beginning on or after Jan. 1, 2015. This will particularly help small and midsize businesses in Connecticut gain access to apprentices.

The credits must be assigned, sold or transferred to taxpayers that are liable for the corporation business tax or premium tax; and they may not be transferred more than three times.

However, lawmakers chose not to extend the state’s Research and Development tax credit to pass-through entities because of the state’s fiscal situation. This was an opportunity missed in that innovation is one of Connecticut’s strongest suits and potentially a key to greater economic growth.

Estate and Gift Tax

Double taxation in Connecticut's estate and gift tax laws has been a problem for some time. Lawmakers took steps to stop that by requiring the Department of Revenue Services to grant credit for gift taxes paid when the gifts are drawn back into the estate. This will be a positive for Connecticut’s small and family-owned businesses because they usually have a great deal of their assets committed to the operation of the business, yet not sufficient liquid assets to pay the estate tax.

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