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The New Biennial Budget: Trick or Treat?

2017 Connecticut Tax Developments

November 21, 2017

Connecticut was the last state in the country to adopt a budget, more than 120 days after the commencement of the current fiscal year.  The biennial budget for the period from July 1, 2017 through June 30, 2019 was the result of bipartisan negotiations between Democrat and Republican legislators, which largely excluded the participation of Governor Malloy.  The Governor signed the bill on October 31, 2017, but simultaneously published a letter that both praised and excoriated the legislation, and which provided for a line item veto of certain of its provisions.  Halloween was a fitting date for the signing, as the budget contains its fair share of tricks and treats for taxpayers.

From a broader structural perspective, the budget purports to put into effect new spending cap restrictions and limitations on the issuance of general obligation bonds.  The legislation fortunately does not provide for an increase in the Connecticut personal income tax marginal rates or the sales and use tax rate, and does not authorize municipalities to collect an additional sales and use tax.  The budget does, however, call for the transfer of funds and funding from a number of other sources within the state government that presage the need for additional structural changes to better assure the state’s future financial stability.  Last week the General Assembly adopted technical changes to the budget to address certain of the Governor’s concerns, and that legislation was signed today. The recent projection of a $203 million deficit for the current fiscal year has led to pressure for the General Assembly to again come into special session to repair the state budget.

Both the regular and extended special legislative sessions witnessed the enactment of significant tax-related legislation.  In the case of the Connecticut personal income tax, the angel investor tax credit is made available for investments in companies in all industries, the exemption for Social Security benefits is expanded, the property tax credit is further limited, and pension and annuity payments are the subject of both a new limited exemption and a tax withholding requirement.  The due date for the corporation business tax return is pushed back, the scheduled FAS 109 deduction arising out of the implementation of combined unitary reporting is both delayed until 2021 and extended from seven to 30 years, and two new programs for the use of stranded state research and development tax credits are created.  The effective period of sales tax permits is reduced from five to two years, and new enforcement mechanisms are developed for delinquent taxpayers.  The budget legislation increases fees and miscellaneous taxes, such as the cigarette and tobacco products taxes, lowers the insurance premium tax and creates a new brownfields revitalization tax benefit program.  Finally, the DRS is authorized to create a Fresh Start Program whereby certain delinquent taxpayers can apply for relief from penalties and one-half of the interest that otherwise would be due on state taxes that have not been reported or were underreported.

This Alert summarizes Connecticut tax legislation enacted, court decisions rendered and administrative guidance published by the DRS during 2017.  Please contact a member of our State and Local Tax Practice Group if you have questions regarding the new tax law changes or how they may affect you and your business.

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