Tough Legislative Session for Small Business
The 2019 Connecticut legislative session was an extremely challenging one for businesses, particularly small business.
And it’s one that CBIA president and CEO Joe Brennan says the state “cannot afford to repeat if we want a strong economy and robust job growth.”
“We expected a difficult session given that many progressive legislators ran on platforms that conflicted with a number of the business community’s goals,” Brennan said.
Progressive legislators championed numerous workplace mandate proposals this session, and were successful with two priority issues—raising the minimum wage and paid family and medical leave.
Those two bills stand out for their huge potential impact on the state’s smallest companies.
Paid FMLA was crafted in a way that makes it the most expansive program of its type in the country.
Mandates ‘Erode Competitiveness’
Among other things, it applies to businesses with as few as one employee, something no other state dictates, allowing up to 12 weeks of paid leave for employees to care for themselves or an extended family member.
Beginning next year, all private sector workers will be taxed 0.5%, regardless of whether they use the program or if their employer already offers leave. Most public sector workers are exempt.
The following year, employees who take leave receive up to 95% of pay, capped at 60 times the minimum wage—$900 per week when the hourly wage hits $15 in 2023.
Hiking the minimum wage to $15 an hour over the next four years will also make life more difficult for small businesses, the state’s engine for job growth.
CBIA’s Eric Gjede said one-size-fits-all mandates like paid FMLA unfairly target small business, many of whom “are absolutely fearful about these measures and their cost burdens.”
“The last thing we should be doing is adding to the growing cost of running a business in this state,” he said.
“Workplace mandates seriously erode the ability of Connecticut businesses to effectively compete, grow, and create jobs.”
The two-year, $43.4 billion state budget deal struck by Gov. Ned Lamont and Democratic legislative leaders relies largely on tax and revenue increases to close projected multi-billion dollar deficits.
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.
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.
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.
Brennan said reducing the credit does nothing to improve trust in the legislature, particularly as the budget also extends the “temporary” 10% corporation tax surcharge.
“This pass-through tax increase directly impacts Connecticut’s small businesses, the engine of the state’s economy,” he said.
“Small business accepted last year’s workaround to the federal cap on state and local tax deductions based on trust and this move really erodes that trust.
“The negative message it sends is resounding.”
Sales Tax Expansion
Income tax and capital gains tax rates are unchanged. However, the expanded sales tax hits nearly all consumers, increasing the cost of liquor, prepared meals, parking, dry cleaning, digital downloads, and interior design services.
The budget 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 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.
Other Tax Issues
In some respects, the two-year budget both gives and takes.
For instance, it eliminates the biennial $250 business entity tax—long regarded as a nuisance tax—while increasing annual business registration filing fees.
On the plus side, it 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 did not adopt Lamont’s proposal to shift a portion of teacher pension costs onto cities and towns, nor did lawmakers ratify a costly proposal mandating real-time sales tax collections.
It 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.
However, the budget 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.
Brennan noted the state’s economy and job growth continue to trail the region and the country, which he called “unacceptable.”
“Given the talent we have here, Connecticut should be a leader in many of the areas where we trail, but too often policy choices hold us back,” he said.
“Lawmakers must take a bipartisan approach in addressing the issues challenging private sector investment and job growth—issues that prevent Connecticut from realizing its true economic potential.”
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