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Connecticut Budget Ditches Capital Gains Tax, Cuts Business Credit (1)

May 31, 2019, 6:51 PM; Updated: May 31, 2019, 8:17 PM

A push by Democratic lawmakers to levy a tax on capital gains earned by wealthy Connecticut taxpayers wasn’t included in a proposed two-year Connecticut budget agreement.

Gov. Ned Lamont (D) and Democratic leaders in the House and Senate announced May 30 they had reached an agreement on a state budget that won’t raise income tax or sales tax rates. A spokesman for Lamont confirmed May 31 that the capital gains tax wasn’t included in the budget agreement, which hasn’t yet been released.

“We’re going to get a budget that’s balanced without raising tax rates on anybody,” Lamont said at a May 30 news conference.

A version of the state budget (S.B. 877) released May 20 by the House had implemented a 2% surtax on capital gains earned by taxpayers in the state’s top income tax bracket—above $500,000 in taxable income for individuals and above $1 million for couples filing jointly.

The surtax, which wasn’t included in the final budget agreement, would have applied to 26,000 of the state’s wealthiest taxpayers and raised $262 million in new annual tax revenue, Rep. Jason Rojas (D), co-chair of the Finance, Revenue and Bonding Committee, previously told Bloomberg Tax.

Lamont adamantly opposed the tax, saying it would have harmed the state’s economy, given wealthy taxpayers a reason to leave the state, and made the budget dependent on a volatile income stream.

The budget agreement would close a $3.7 billion budget gap in part through concessions from state employees on health care costs, as well as savings gained in a settlement being hammered out with the Connecticut Hospital Association to resolve a four-year old lawsuit involving the state’s provider tax. The budget shifts $800 million to the state’s ‘rainy day’ fund, pushing it over $2 billion, lawmakers said.

Lawmakers promised to approve the budget before the Connecticut General Assembly wraps up its legislative session June 5.

Breaking a Promise?

Not everyone thinks that the agreement doesn’t raise taxes.

The state’s largest business group, the Connecticut Business & Industry Association, said the budget contains a provision to reduce a tax credit for pass-through entities from 100% to 87%, which would cost the state’s businesses an estimated $53 million.

“It is a last minute change that had no public hearing and no opportunity for small businesses to speak out,” CBIA president and CEO Joe Brennan said in a May 30 blog post.

A 2018 law (Public Act No. 18-49) contained two options to help the state’s taxpayers offset the impact of the $10,000 federal cap on the deduction for state and local taxes paid contained in the 2017 federal tax law.

The bill created a new 6.99% “revenue-neutral” state tax on pass-through entities, which was offset by a corresponding personal income tax credit. The amount of the new state tax is a deductible expense on a business’s federal income tax return, according to the Department of Revenue Services. The measure is meant to reduce the federal tax obligations of small business owners.

However, with the proposed reduction of the credit, the state tax on pass-through entities wouldn’t be completely offset.

“The ink is barely dry on that legislation and they’re already looking to take more revenue from businesses,” Eric Gjede, CBIA vice president for government affairs, told Bloomberg Tax. Businesses took state lawmakers at their word that the credit would completely offset the new tax.

“The citizens of Connecticut have a real trust issue with state government, and this is another example why,” he said.

(Adds comments in paragraphs 15 and 16.)

To contact the reporter on this story: Aaron Nicodemus in Boston at anicodemus@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Megan Pannone at mpannone@bloombergtax.com

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