Connecticut to Split From Trump’s Corporate Tax Breaks in Budget

Connecticut lawmakers have struck a budget deal with Gov. Ned Lamont (D) to sever parts of the state corporate tax code from new federal tax breaks and to simplify the state tax on cannabis.

The state legislature approved the changes May 2 in a budget bill for the upcoming fiscal year. Lamont issued a statement in support the bill, which he said he will sign before the Democrat-controlled legislature adjourns May 6.

The Republican tax package signed by President Donald Trump last year carved out several new federal tax breaks for businesses that state lawmakers across the nation must decide whether to keep. Connecticut is one of 26 states and the District of Columbia that conforms to the Internal Revenue Code on a rolling basis for its corporate income tax, meaning state lawmakers must pass legislation to prevent any federal tax changes from automatically applying to the state tax code.

The budget adjustment to Connecticut’s $55 billion spending plan for fiscal 2026-27 decouples the state tax code from a new federal expensing practice for “qualified production facilities” like manufacturers, which allows businesses to deduct the full cost of equipment or property in the first year it was purchased. State budget officials have estimated the change would save the state roughly $100 million.

The measure also limits a new deduction practice for research and experimentation costs that was approved under the 2025 federal tax law. Businesses are now able to immediately deduct R&E costs on their federal tax returns, instead of spreading those costs over five years. While the federal benefit is retroactive to the 2022 through 2024 tax years, the Connecticut bill disallows taxpayers from using the benefit for state tax purposes ahead of 2026.

Connecticut lawmakers approved expanding the state’s research and development tax incentive to pass-through entities, allowing early-stage biotech and fintech companies to qualify for the benefit. The program currently allows corporations to claim incremental and non-incremental credits for research and development expenses incurred in the state.

The budget adjustment also replaces three different retail taxes on the sale of cannabis with a single levy of 10.75% of a retailer’s gross receipts from such sales. It also increases the exemption for the state’s “sales tax free week” from $100 to $300 and permanently exempts nonelectronic school supplies from the state’s 6.35% sales and use tax.