Gov. Malloy and Democratic leaders last week agreed on a $40.5 billion, two-year state budget that would close Connecticut’s projected $3.2 billion deficit with a combination of spending cuts, major tax increases and prospective state employee concessions.

Details were still being negotiated at the time of writing, but 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 the governor.

Many of the tax changes, specifically the increase in the personal income tax, would 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 proposal, the state’s 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 pay 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 many other changes in SB 1007, it would:

  • Eliminate the proposed “throwback” tax that would have impacted manufacturers and other businesses that export goods and services
  • Increase the corporate income tax surcharge from 10% to 20% for income years 2012 and 2013
  • Increase the electric generation tax proposed by the governor from $58 million to $72 million (sunsetted after two years)
  • Increase the sales tax to 6.35%, applicable to all taxable sales
  • Introduce an Amazon sales tax on online purchases shipped to Connecticut residents if the Internet sellers have marketing affiliates located within the state
  • Creates a 7% luxury tax, starting with the first dollar
  • Reduce the residential property tax credit off the personal income tax from $500 to $300
  • Reduce the estate tax exemption from $3.5 million to $2 million  
  • Eliminates the proposed increase on the insurance premium tax but changes the cap on the insurance premium tax credit from 70% to 30%

Spending changes 

In February, Gov. Malloy proposed cutting state spending by about $750 million through agency consolidations and other efficiencies, such as by making 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 $2 billion over two years from the budget.

Economic backdrop

Serving as a backdrop to the budget negotiations is Connecticut’s struggling economy. The state’s unemployment rate climbed back 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 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 lawmakers to cut spending further in order to reduce the increased tax burden on Connecticut residents and businesses.  

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