Governor Lamont Signs Connecticut Biennial Budget: New Deal or Déjà Vu?

On June 26, 2019, Governor Ned Lamont signed a $43.4 billion budget for the 2020 and 2021 fiscal years.  The biennial budget addresses the projected $3.7 billion budget deficit for the period, but still increases spending by 1.7% in the 2020 fiscal year, and by 3.4% in the 2021 fiscal year.  Although a letter dated June 25, 2019 published by the Office of Fiscal Analysis projected a roughly $700 million surplus for the 2018-2019 fiscal year, and an increase to $2.28 billion in the Budget Reserve Fund (i.e., “rainy day fund”), the new budget contains hundreds of millions of dollars in tax and revenue increases and, in the words of the Connecticut Business and Industry Association, “shifts billions of dollars in teacher pension debt and interest onto future taxpayers after 2032.”  

For Connecticut taxpayers, and particularly business taxpayers, it was a troublesome regular legislative session, but not as bad as it could have been.  Governor Lamont was instrumental in preventing an increase in the marginal income tax rates and the adoption of a capital gains tax on high income taxpayers, but businesses will need to contend with a hike in the minimum wage, new paid family and medical leave legislation, an extension of the purported “temporary” 10% corporation business tax surcharge, a reduction in the cap on the use of corporation business tax credits and a reduction in the credit arising from the payment of the new Connecticut pass-through entity tax, resulting in a tax increase for many owners of limited liability companies, S corporations and partnerships.  On a positive note, the Legislature agreed to phase out the corporation business capital base tax, extended for five years the angel investor tax program and repealed the biannual business entity tax (but simultaneously increased the fees payable to the Office of the Secretary of the State by the pass-through entities that were subject to that tax).  Businesses should be aware, however, that the General Assembly formed a Payroll Commission to evaluate the possible implementation of a payroll tax on employers in Connecticut commencing on January 1, 2021, and charged the Department of Revenue Services (the “Department” or “DRS”) to take those actions intended to facilitate the possible electronic deposit of sales tax receipts on a daily basis. On August 15, the DRS sent an email to employers seeking information for the new Payroll Commission regarding the number of their Connecticut employees and the total wages paid to those employees.

Individual taxpayers also will experience an increase in their Connecticut tax liability.  The General Assembly extended the current limitations on the availability of the property tax credit, delayed the increase in the state teachers’ retirement system payment deduction and repealed the STEM graduate tax credit.  More significantly, although the Legislature thwarted the Governor’s attempt to extend the sales and use tax to an even longer list of services, it did extend the tax to digital goods and downloads, motor vehicle parking, dry cleaning and laundry services and interior design services, and increased the tax rate on meals and beverages and non-business computer software downloads.  There also is a new ten-cent tax on single use plastic check-out bags, and a higher conveyance tax rate on sales of real property of more than $2.5 million (subject to a possible increase of the property tax credit that may be taken by the seller of the residence if the seller remains in Connecticut).  In addition, an attempt to repeal the gift tax was removed from the final budget legislation.  The regular session also resulted in a myriad of other excise and other tax law changes with which businesses and individuals will need to cope.

This newsletter summarizes Connecticut tax legislation enacted, court decisions rendered and administrative guidance published by the Connecticut Department of Revenue Services during the first six months of 2019. 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.

On July 11, our tax attorneys hosted a CLE Webinar entitled “Annual Connecticut Tax Update 2019.”  Register to view an on demand replay.