Connecticut General Assembly Approves $41 Billion State Budget

Synopsis

The Connecticut General Assembly approved a two-year, $41.3 billion budget, three months after the budget was originally due and most of the bill was signed, on October 31, 2017, by Governor Malloy. The budget raises taxes, eliminates or lowers tax credits, cuts funding for the University of Connecticut, cuts town aid, modifies the statutory spending cap, and raids the energy conservation funds.  While the current biennial budget agreed to by the General Assembly is balanced, the next biennial budget (for the 2020 and 2021 fiscal years) is projected to have a $4.6 billion built-in deficit.

Issue

The fiscal package passed by the House (126-23) and Senate (33-3) is expected to increase taxes by approximately $500 million.  Most of these tax increases relate to increased taxes on hospitals.  While it was unclear if Governor Malloy would sign the budget, other than using his line-item veto on the hospital tax provisions, Governor Malloy signed the bill on October 31, 2017. 

Highlights of the proposed budget deal include the following:

Fresh Start Program

• The Department of Revenue Services (DRS) Commissioner is authorized to establish a Fresh Start Program, allowing the DRS to enter agreements with qualified taxpayers who have outstanding tax liabilities. In exchange for filing outstanding returns and paying tax liabilities, DRS will waive penalties and half of the interest due on delinquent state taxes (other than motor carrier road taxes). For taxpayers who failed to file a tax return, DRS will allow a limited look-back period (i.e., limit the scope of its review of prior year returns). 
• The program will run from the date of the bill's passage to November 30, 2018 and covers any tax returns due on or before December 31, 2016.

Corporation Business Tax

Current Connecticut law allows certain publicly-traded companies to claim a deduction over a seven-year period if combined reporting (for CT state income tax purposes) results in an acceleration of income tax (increase in net deferred tax liabilities or decrease in their net deferred tax assets).  This deduction is referred to as a “FAS 109” deduction.  The period for claiming a FAS 109 deduction is extended from seven to thirty years for publicly-traded companies filing on a combined basis. 

Personal Income Tax

• Beginning in 2018, the income threshold for the 100% exemption for Social Security benefits is increased for:

• The property tax credit is limited, for the 2017 and 2018 tax years, to senior citizens (age 65 or older) and those taxpayers with dependents.
• Beginning in 2017, the Earned Income Tax Credit is reduced from 30% to 23%. 
• Beginning in 2019, a new refundable personal income tax credit is established for college graduates in science, technology, engineering or math-related fields (STEM) who live and work in Connecticut. The credit is $500 and may be claimed for each of the first five successive taxable years after graduation, provided the graduate lives in
• Connecticut or moves to Connecticut within two years of graduation.
• The income tax on pension and annuity income is phased out, from 2019 through 2025, for:
  • Single filers, married people filing separately, and heads of households with AGI less than $75,000, and
  • $100,000 AGI for married people filing jointly.
  • A similar change to the existing income tax exemption for pensions and annuities paid by the Teachers’ Retirement System (TRS) is also enacted and delays, by two years, the scheduled increases in the TRS income tax exemptions previously enacted.

Sales Tax

There is an expanded exemption for sales of services between affiliated businesses. 

• Starting July 1, 2019, the ownership threshold to qualify for exemption is lowered from 100% to 80% for media businesses: (1) organized as corporations or single member limited liability companies (LLCs) and (2) principally located in the state.

Estate and Gift Tax

• Beginning in 2018, the estate and gift tax threshold is increased over a three year period (from $2 million) to the federal estate tax threshold ($5.49 million for 2017).
• Beginning in 2019, the cap on the maximum estate and gift tax is lowered from $20 million to $15 million. 

Business Tax Credits 

• The Neighborhood Assistance Act Tax Credit annual aggregate tax credit cap is lowered from $10 million to $5 million.
• The Green Building Tax Credit is eliminated for income years beginning on or after December 1, 2017.
• The moratorium on film and digital media production tax credits for certain motion pictures is made permanent. Effective January 1, 2018, the applicability of these credits is expanded to include the gross receipts tax on certain cable, satellite, and competitive video services. 

Miscellaneous Taxes

• Effective July 1, 2017, the hospital provider tax was increased from the current rate of 6% to a rate calculated by formula, based on the amount of revenue for each fiscal year. *Note that the Governor has vetoed the provisions of the budget bill relating to the hospital provider tax. Therefore these provisions are not part of the budget signed into law on 10/31/17. However, the hospital provider tax provisions are expected to become part of the final budget through either an override of the Governor’s veto or through corrective legislation. 
• The tax on cigarettes rises from $3.90 to $4.35 per pack, effective December 1, 2017.
• The tax on smokeless tobacco rises from $1 to $3 per ounce effective December 1, 2017.
• The motor vehicle mill rate cap is increased from 32 to 39 mills for the 2016 assessment year and to 45 mills for the 2017 assessment year.
• A new 10.5% gross receipts tax is imposed on fantasy sports contests effective July 1, 2019.
• Effective January 1, 2018, a new 25 cent fee is imposed on transportation network companies (i.e., Uber and Lyft) for rides originating in Connecticut.
• Effective in 2018, the insurance premium tax is reduced from 1.75% to 1.5%.
• The 3% car and truck rental surcharge is eliminated and, instead, authorized rental companies can charge lessees individually itemized charges or fees as part of a rental agreement effective January 1, 2018.
• Effective December 1, 2017, the admission tax exemptions for the XL Center, Webster Bank Arena in Bridgeport, Dunkin Donuts Park in Hartford, and New Britain Stadium are eliminated.

What Does CohnReznick Think?

This bipartisan budget, crafted without the direct involvement of Governor Malloy, ends a political stalemate that extended 118 days. While the Governor signed most of the budget – he did veto portions of the proposed legislation relating to increasing taxes on hospitals. The legislature will meet over the next few weeks to either override the line–item veto or amend the language for the hospital tax. As with any substantial legislation, there undoubtedly will be revisions to this bill to correct drafting oversights. While the current (2018-2019) biennial budget is “balanced,” the next biennial budget (for the 2020 and 2021 fiscal years) is projected to have a $4.6 billion built-in deficit, so stay tuned.

While some of the original budget proposals significantly reduced aid to cities and towns ($700 million), as well as dramatically increased municipalities’ share of teacher retirement costs (projected to climb from $1 billion to $6 billion in the next 15 years), the actual adjustments in the budget were far less severe. Total cuts to municipal aid were only $34 million and there was no increase to municipalities’ share of teacher retirement costs.  Also, the budget included additional aid to the City of Hartford to help stabilize its financial situation, including the potential guarantee of refinanced debts.

Contact

Please contact Matt Nick, Director, State and Local Tax Services, at Matthew.Nick@CohnReznick.com or 860-271-7933 or Cindy Galamgam, Senior Manager, State and Local Tax Services, at Cynthia.Galamgam@CohnReznick.com or 959-200-7239 to talk about how these changes may impact you.