Connecticut businesses missed out on a major tax cut this legislative session, but several private-sector tax changes did get included in the two-year, $51.1 billion state budget passed by both the House and Senate in recent days.
Gov. Ned Lamont has pledged to sign the bipartisan budget. In December, Lamont told the Hartford Business Journal that he was considering an income tax cut as well as sunsetting the 10% surcharge on the corporation tax amid a multibillion-dollar state budget surplus.
The income tax cut made it through the legislature, but the 10% corporate surcharge has been extended for three additional years, through fiscal 2025.
That will raise $150 million in tax revenues for the state over three fiscal years.
However, the budget also includes a new incentive for employers to avoid the surcharge.
Specifically, it creates tax incentives for corporations that offer an employee stock-sharing plan that distributes common stock to participating employees.
If the stock-sharing plan meets certain criteria — including that at least 80% of the company’s eligible employees (i.e., full-time employees based in Connecticut whose annual cash contribution from the company is less than $200,000) participate in the plan — a corporation is exempt from the corporation business tax surcharge.
The program starts in 2025, but companies won’t be able to get an exemption from the surcharge until 2027.
The budget also requires the Department of Revenue Services and Office of Policy and Management to study the impact of the stock-sharing plan.
Surcharge history
The corporate business tax surcharge has long been an issue at the state Capitol. It was first adopted in 1989, at a time when the state was facing significant budget deficits, and has been modified, eliminated and reinstated multiple times over the past three decades, according to the Office of Legislative Research (OLR).
Connecticut currently has a 7.5% corporate tax rate that is levied on gross taxable income of most businesses and corporations doing business in the state. Connecticut also requires certain corporation business taxpayers to pay an additional surcharge equal to a specified percentage of their tax liability before tax credits are applied, according to OLR.
The surcharge applies to companies that have more than $250 in corporation tax liability, and either have at least $100 million in annual gross income or file combined or unitary returns, according to OLR.
For the 2018 to 2022 income years, the surcharge has been 10% of taxes owed. In 2018, the surcharge generated $76.7 million in revenue.
Previously, from 2012 to 2017, Connecticut had a 20% surcharge. The last time the state didn’t assess the surcharge was in 2008.
State lawmakers last year extended the surcharge through 2022, but it expired on Jan. 1. The surcharge will now continue for fiscal years 2024, 2025 and 2026.
