Tax Increases Will Hurt Small Businesses

Issues & Policies

The biggest challenges facing Connecticut are recharging the state’s economy and getting the more than 100,000 people who lost jobs during the recession back to work. But the budget proposals nearing final votes in the legislature work against those goals by hurting the state’s main job-creators: small and midsize businesses.

The tax bill (SB 1007) advanced by the Finance Committee restructures Connecticut’s personal income tax in ways that significantly increase taxes on many of the state’s smaller companies—making it harder for them to compete, grow, create jobs and invest in the state.

Under the proposal, a partial restoration of the homeowner’s property tax credit will be offset by restructuring the personal income tax to impose the top 6.7% rate at lower income thresholds and phase out the value of marginal rates.

What many policymakers don’t realize is that this change will impact thousands of small and midsize businesses in Connecticut that pay their business taxes through the personal income tax.

As an example to show the impact of the tax change, S corporations and other pass-through business entities with adjusted gross incomes of $700,000—a modest amount for a growing business–would pay the 6.7% percent rate starting with their first dollar of income. Under that scenario, they could see as much as a 34% tax hike—making it nearly impossible to grow and create jobs and potentially taking untold millions of dollars out of our struggling economy.

The rate change under SB 1007 would also leave those businesses with roughly the same tax liability as if they were located in New York State.

Significantly increasing taxes on a relatively small number of taxpayers also makes our income tax even more volatile and subject to the swings on Wall Street, adding to the likelihood of future budget deficits.

Spending bill

On the spending side, the budget bill (HB 6380) approved by the Appropriations Committee  rejects many of the ideas put forward by Republican and Democratic legislators to further cut state spending. It also relies on $2 billion in state employee union concessions that are still being negotiated.

Will those negotiations reform the state’s compensation and benefits policies, trim future liabilities and make state government more efficient? The public deserves to know before a final vote on the budget.

What’s more, if state revenue projections for next year continue to improve, the increased revenues should be used to help offset the proposed tax increases.

Further cuts

Gov. Malloy was right when he said Connecticut can’t solve its budget crisis without getting the state’s economy growing again; and that we need to sacrifice to put an end to future deficits and tax increases, and reopen our state for business.

The business community urged state lawmakers to build on the governor’s recommended spending cuts to reduce the size and scope of the proposed tax increases. The budget bills now before the legislature fall short of those goals, but the many good ideas that could cut spending further, limit tax increases and help state government work better are still available.

CBIA urges lawmakers to take a second look at the budget and work together to cut spending and reduce the increased tax burden on Connecticut residents and businesses. A better budget  will restore business confidence, create jobs and ensure a brighter future for everyone.


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