2012-2013 State Budget: Tax Increases Will Have Big Impact on Business

The $40 billion biennial state budget signed by Gov. Malloy in April relies on tax increases of $2 billion in Fiscal Year 2012 and $1.8 billion in FY 13.

It also depends on $1.6 billion in state employee concessions, a figure reached in a tentative agreement between the governor and state employee union leadership on May 13.

Gov. Malloy’s original budget proposal had called for $2 billion in concessions. The difference will be made up through “a mix of additional spending cuts and existing budgeted revenues,” said the governor.

Complete details of the agreement had not been released at press time, and ratification by individual state employee unions was expected to take several weeks.

Tax Increases

Many of the tax changes, particularly the personal income tax increase, will impact businesses. In Connecticut, small businesses that are formed as S corporations, limited liability companies, or other similar structures pay tax on their business income under the personal income tax, not the corporate income tax.

Under the new budget, the state’s personal income tax has a new top rate of 6.7% that would begin at lower income thresholds ($500,000 for joint filers).

Significantly, for joint filers with incomes exceeding $700,000, lower marginal rates will not apply and taxpayers will pay the higher rate from dollar one. Moreover, the previous top rate of 6.5% will trigger at $400,000.

To add to the burden, the new income tax rates are retroactive to Jan. 1, 2011.

Among the budget’s many other tax provisions are those that:

• Increase the corporate income tax surcharge from 10% to 20% for income years 2012 and 2013 (the throwback rule was rejected)

• Increase the sales tax to 6.35%, applicable to all taxable sales

• Expand the list of services and items to which the sales tax will be applied

• Reduce the residential property tax credit off the personal income tax from $500 to $300

• Impose a two-year, $72 million tax on electric generators

• Introduce an Amazon sales tax on online purchases shipped to state residents

• Create a 7% luxury tax, starting with the first dollar (on clothing costing more than $1,000, jewelry above $5,000, cars above $50,000, and boats above $100,000)

• Reduce the estate tax exemption from $3.5 million to $2 million

• Change the cap on the insurance premium tax credit from 70% to 30% for 2012 and 2013.

The Spending Side

The budget contains about $250 million more in spending than what the governor had proposed (much of it to obtain additional federal Medicaid reimbursement), but it offsets the increase with other reductions. Overall, lawmakers trimmed some state employee positions and expenses but added back some programs the governor had slated for cutting.

Revenues Rising

Against the backdrop of massive tax increases, the state comptroller says

that state revenues have climbed by $414.9 million since April—raising expectations for a state fiscal year-end balance of $509.6 million. With the tax increases, the new budget is projected to produce

a nearly $1 billion cumulative surplus over the next two fiscal years, raising questions about the need for such a steep tax hike.

Economy Struggling

At the same time, the state’s unemployment rate climbed back over 9% in March—above the national average of 8.8%—with the state’s labor markets reporting a loss of 6,000 jobs.

The impact of the recession continues to be felt sharply by Connecticut employers, who are already facing at least $70 million in new unemployment compensation taxes and possibly more.

For more information, contact CBIA’s Bonnie Stewart at 860.244.1925 or bonnie.stewart@cbia.com. ■

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