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Connecticut Legislature Approves Two-Year Budget Deal


6/8/15
 
Synopsis
 
The Connecticut General Assembly approved a $40.3 billion biennium budget. The budget raises corporate taxes, implements mandatory unitary combined reporting, increases income taxes on the wealthy and middle class, and increases the rate of sales tax on certain items and services.
 
Issue
 
Amid much criticism, HB 7061 passed both the House (73-70) and Senate (19-17) by narrow margins. The bill received strong public statements of disapproval from major Connecticut businesses – General Electric, Aetna, and Travelers – warning that they would consider leaving Connecticut if the budget bill were enacted. The fiscal package is expected to increase business taxes by approximately $700 million and generate $2 billion in new tax revenue overall. Although Governor Malloy is expected to sign the bill, he has publically indicated that he is willing to reconsider certain tax increases in a special legislative session.
 
Highlights of the proposed budget deal include the following changes:
 
Corporation Business Tax
  • For income years starting on or after January 1, 2015, the bill imposes a unitary reporting requirement.
  • Extends the 20% corporate income tax surcharge for two additional years and enacts a 10% surcharge for 2018.
  • Limits the amount of the net operating loss carryforward deduction to a maximum of 50% of the current year income.
  • Reduces the amount of credits that are available to offset tax due from 70% to 50.01%.

Personal Income Tax
  • Increases the marginal income tax rate from 6.7% to 6.9%($500,000 for married filing jointly, $400,000 for head of household, and $250,000 for single filers).
  • Creates a new 6.99% tax rate for high income earners ($1 million for married filing jointly, $800,000 for head of household, and $500,000 for single filers).
  • Reduces the property tax credit from $300 to $200 and increases the phase-out of the credit for high income earners.
  • Fully exempts all federally taxable military retirement pay.
 
 
Sales Tax
  • Increases the sales tax on computer services and data processing from 1% to 2% on October 1, 2015, and to 3% on October 1, 2016 and also expands the definition of such services to include website creation, development, hosting and maintenance.
  • Enacts a sales tax on car washing services.
  • Increases the sales tax rate on luxury items (motor vehicles, jewelry, clothing and footwear) from 7% to 7.75%.
  • Repeals the sales tax exemption for clothing and footwear costing less than $50 that was scheduled to take effect July 1, 2015.
  • Enacts a new provider tax on ambulatory service centers.

There are a number of other minor changes in addition to the changes noted above, including a sales tax on the rental of heavy equipment, extending the film and digital media production tax credit moratorium, limiting the property tax rate that may be imposed on motor vehicles, and a number of changes relating to estate and gift taxes.
 
What Does CohnReznick Think?
 
Faced with an estimated budget deficit of over $2 billion in the upcoming years, it is not surprising that the Connecticut General Assembly chose to raise taxes. However, the nature and breadth of these taxes are extremely unpopular. Although Governor Malloy is expected to sign the bill, he has indicated that the revenue changes may be revisited in the Connecticut General Assembly’s special session. We will provide future updates as Connecticut’s budget evolves.
 
Contact
 
For more information, please contact Milo Peck, a CohnReznick manager, at milo.peck@cohnreznick.com or 959-200-7287, or Matt Nick, a director, at matthew.nick@cohnreznick.com or 860-841-0778, or Patrick Duffany, a partner and the Firm’s State and Local Tax Practice Leader, at patrick.duffany@cohnreznick.com or 959-200-7270.
 
To learn more about CohnReznick's Tax Practice, please visit our website.
 

Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

 

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