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HARTFORD – Pledging to leverage Connecticut’s projected budget surplus into “sustainable” tax cuts in his upcoming budget proposal, Gov. Ned Lamont put forward a plan on Wednesday to restore a tax credit his administration said would save about 123,000 mostly small businesses about $60 million a year in state taxes.
In a press conference at Express Kitchens in Hartford on Wednesday morning, Lamont proposed restoring the pass through entity tax credit that was trimmed in 2019 – a move that effectively increased the state income tax on owners of “pass-through” businesses.
Connecticut lawmakers created the pass-through entity tax as a workaround for business owners after Congress capped how much state income taxes could be deducted from federal tax bills at $10,000 in 2017.
The new state tax was levied on businesses that pass income through to the owner, rather than on the owner’s personal income – since deductions of state business taxes weren’t limited. After one year, the tax credit was reduced so that business owners couldn’t claim the full amount of what they paid – meaning they ended up paying more state tax.
Lamont is proposing to restore the full credit, bringing their taxes back down, Department of Economic and Community Development Commissioner Designate Alexandra Daum said.
“In this way, [businesses] are able to lower our gross earnings and be able to keep more of our money,” Department of Revenue Services Commissioner Mark Boughton said. “Every small business in this state that uses an LLC will be thrilled.”
In a statement, House Minority Leader Vincent Candelora, R-North Branford, pinned the 2019 cut to the tax credit on Lamont and Democrats, and welcomed Lamont’s support of restoring the full credit – which he claimed as a Republican proposal.
“It’s good news that Governor Lamont continues to show that he’s on board with the tax relief Republicans are pursuing, in this case correcting a tax hike on businesses that was included in the budget he and legislative Democrats put into action in 2019,” Candelora said. “It’s my hope that the combination of his proposal and our caucus bill to restore the pass-through entity tax credit will generate momentum within the General Assembly and get this done for taxpayers and the small business community.”
Max Kothari, chair of the Hartford Chamber of Commerce and CEO of Express Kitchens – where the press conference was held – said the shift would reduce the federal taxes for one of his LLCs by $4,823 this year.
Office of Policy and Management Secretary Jeff Beckham said that restoring the full tax credit will mean the nearly 123,000 businesses that pay the tax will owe the state a combined $60 million less in taxes each year.
Under Lamont’s budget proposal, which he will present to lawmakers in February, the shift cuts the state’s general fund by $12 million – but its impact on the general fund in future years will depend on where the state’s revenue surplus stands, Beckham said.
Beckham said restoring the tax credit was possible because of “a string of very good news” for Connecticut’s finances.
As Lamont prepares to present his budget proposal for the next two years, new consensus revenue estimates released on Tuesday forecast about $550 million more in general fund revenue over the next two years than earlier projections.
That includes a $265 million bump in year one of the biennial budget from higher than expected revenue from income and corporate taxes – which raises the Comptroller’s latest projection of a $2.87 billion surplus to a projected surplus north of $3 billion.
Lamont said in a written statement Tuesday that the rosy projections will allow him to present a budget that funds education, childcare, workforce development and housing – while also allowing him to propose the “meaningful middle-class tax cut” that he pledged in his State of the State speech earlier this month.
Lamont said Wednesday this was the “first of several” tax cut proposals he plans to announce – though he said his overall tax cut proposals will “probably not [be] as much as many people would like,” as he doesn’t want to make cuts that have to be walked back.
“I want to do it sustainably,” Lamont said. “What I don’t like is, ‘Hey, let’s eliminate this tax,’ and then two years later, ‘We’ve got to have it back.’ That is a psychological hell for families and small businesses.”