$43 Billion State Budget Raises Costs for Businesses, Consumers

Issues & Policies

Gov. Ned Lamont and Democratic legislative leaders agreed on a $43.4 billion, two-year budget that resolves a multi-billion dollar deficit largely through tax and revenue hikes.

The budget bill, HB 7424, approved by the state House and Senate in the final days of the 2019 legislative session, now goes to the governor’s desk, where he’s expected to sign it.

The state House passed the budget on a 86-65 vote June 3 with Democratic representatives Buddy Altobello (D-Meriden), Jill Barry (D-Glastonbury), Pat Boyd (D-Pomfret), John Hampton (D-Simsbury), and Stephen Meskers (D-Greenwich) joining all Republicans in voting against it.

The Senate approved it on a 20-16 vote June 4 with Democrats Alex Bergstein of Greenwich and Joan Hartley of Waterbury joining all Republicans in opposition.

While the budget deal resolves the state’s projected two-year, $3.7 billion deficit, it increases spending by 1.7% in fiscal 2020 and by 3.4% the following year.

Tax, Revenue Hikes

The budget features over $2 billion in tax and revenue increases, although a significant portion of that comes from a negotiated agreement with hospitals.

It raises about $340 million in the first year and $365 million in the second through hikes in taxes and fees, and canceling approved tax breaks that have yet to take place.

While the income tax and capital gains tax rates are unchanged, an expanded sales tax will hit nearly all consumers by increasing the cost of liquor, prepared meals, parking, dry cleaning, digital downloads, and interior design services.

“This session was extremely challenging, one the state cannot afford to repeat if we want a strong economy and robust job growth.”

CBIA’s Joe Brennan

It includes a 10-cent tax on plastic bags that’s expected to raise $54 million over the biennium, and a new conveyance tax on homes that cost $2.5 million or more.

It also levies the 6.35% state sales tax on safety items and apparel, meaning it will cost companies more to comply with workplace safety laws.

The budget also shifts billions of dollars in teacher pension debt and interest onto future taxpayers after 2032.

It assumes $363 million in savings through refinancing state employee pensions, although lawmakers have yet to approve a resolution amending the state’s contract with unions.

Small Business Tax Hike

A year after lawmakers adopted a pass-through entity tax and corresponding credit designed to help small businesses, the budget reduces that credit to 87.5%.

That will cost small businesses another $53 million.

While that’s just a drop in a $43 billion budget, the negative message it sends to small business is resounding, said CBIA president and CEO Joe Brennan.

“This tax increase directly impacts Connecticut’s small businesses, the engine of the state’s economy,” he said.

“Small business accepted last year’s workaround based on trust and this move really erodes that trust.”

In all, the budget seeks to squeeze roughly $150 million from Connecticut businesses through the pass-through tax hike and other restrictions on business tax credits.

That does not include the impact of paid family and medical leave and a minimum wage hike, both of which are expected to be massive financial burdens for businesses.

Brennan said the legislative session was “an extremely challenging one” for businesses, especially small businesses.

“We expected a difficult session given that many progressive legislators ran on platforms that conflicted with a number of the business community’s goals,” he said.

“It was a session the state cannot afford to repeat if we want a strong economy and robust job growth.”

‘Temporary’ Surcharge Remains

The budget also cancels a previously approved plan to eliminate the “temporary” 10% surcharge on the corporation tax.

It does eliminate the business entity tax, a $250 fee businesses pay every two years and long regarded as a nuisance tax.

However, the end of the business entity tax is largely offset by an increase in annual business filing fees from $20 to $80.

Also, beginning in 2021, increased filing fees will cost limited liability partnerships and limited liability corporations another $12 million a year.

The budget did not adopt Lamont’s proposal to shift a portion of teacher pension costs onto cities and towns, nor did lawmakers adopt a potentially costly proposal to mandate real-time sales tax collections.

The approved budget avoids many of the tax initiatives pushed by legislative progressives, including higher personal income tax rates and a new tax on capital gains.

It also gradually phases out the capital base tax, which may benefit businesses with long product development cycles, and extends the angel investor tax credit program.

The budget features a number of workforce development measures, including the public-private Partnership for Connecticut and funding for the state’s workforce investment boards.

It also includes economic development measures such as the Municipal Redevelopment Authority and a manufacturing champion within the Department of Economic and Community Development.

Unresolved: Tolls

But the two-year plan diverts more than $175 million in revenue from the Special Transportation Fund to the General Fund over the next two fiscal years.

Republicans said this move sets the stage for tolls on Connecticut highways, an unresolved hot button issue this session.

As the session ended June 5, Lamont told lawmakers he would be calling them back into special session to address implementing highway tolls.

“Good night, good luck, and I’ll see you in a couple of weeks,” he said.

For more information, contact CBIA’s Eric Gjede (860.480.1784) | @egjede


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