Tax Credit Cut Unfairly Penalizes Small Businesses
Connecticut’s pass-through entity tax—created to help small businesses—has now forced many of them to pay the state’s highest income tax rate.
The tax and a corresponding credit were implemented in 2018 to make businesses whole after federal tax changes capped the deductibility of state and local taxes, penalizing small businesses across the country.
However, when the state legislature reduced the credit to 87.5% the following year to fill a budget gap, small businesses—the lifeblood of Connecticut’s economy—were again unfairly penalized.
CBIA president and CEO Chris DiPentima called for lawmakers to restore the credit to its original 93.01%, and “return approximately $60 million to more than 100,000 of Connecticut’s smallest employers.”
DiPentima told a Feb. 26 Finance, Revenue, and Bonding Committee hearing that while 28 states followed Connecticut’s lead by enacting tax measures to mitigate the federal caps on SALT deductions, just two opted to keep a portion of the corresponding credit—Massachusetts and Connecticut.
Highest Tax Rate
He testified that small businesses set up as pass-through entities typically pay their state taxes via the personal income tax, with a top rate of 6.99%.
“However, the reduction in the pass-through entity tax credit means those small businesses are now paying an effective tax rate of 7.8%,” he said.
“That’s more than the 7.5% corporate tax rate and the state’s highest income tax rate. Not to mention it’s also regressive.
“Keep in mind that small business owners are directly covering other expenses from income, including payroll, unemployment, Social Security, and other taxes and insurance.
“Unlike corporations, pass-through entities are also taxed on income that is invested back in the business. In other words, they are taxed for doing exactly what we want them to do—grow their footprint here.”
DiPentima was speaking in support of HB 5549, which restores the credit to the original 93.01% level.
The bill was introduced by House Minority Leader Vincent Candelora (R-North Branford), Sen. Jason Perillo (R-Shelton), representatives Tim Ackert (R-Coventry), Devin Carney (R-Old Saybrook), Tom O’Dea (R-New Canaan), David Rutigliano (R-Trumbull), Tami Zawistowski (R-East Granby), and Lezlye Zupkus (R-Prospect). It is co-sponsored by Sen. Rob Sampson (R-Wolcott).
‘Double Taxation’
National Federation of Independent Business state director Andy Markowski told the committee that lowering the credit represented a tax increase on small businesses.
“[It’s] essentially a tax increase or perhaps considered double taxation on a portion of the state income of certain small business owners organized as pass-through entities,” he said.
“Restoration of the full PET credit would allow for the tax treatment of affected small business owners to be in line with the PET’s original intent.”
NFIB’s Andy Markowski said lowering the credit represented a tax increase on small businesses.
DiPentima called for lawmakers to provide more support for small businesses, “who often compete on an uneven playing field.”
“For instance, they are not eligible for the research and development tax credit or the student loan tax credit program,” he said.
“Restoring the pass-through entity tax credit is a crucial element of that support—promoting and nurturing small businesses while fostering economic growth, with the resulting increased economic activity and job creation also generating additional revenues for the state.”
For more information, contact CBIA’s Chris Davis (860.244.1931).
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CBIA IS FIGHTING TO MAKE CONNECTICUT A TOP STATE FOR BUSINESS, JOBS, AND ECONOMIC GROWTH. A BETTER BUSINESS CLIMATE MEANS A BRIGHTER FUTURE FOR EVERYONE.