As he prepares for the 2023 legislative session, Gov. Ned Lamont said he is considering several tax policy proposals next year, including allowing the expiring corporate business tax surcharge — an extra cost the business community has long lobbied against — to sunset.
Lamont, in a Monday interview with the Hartford Business Journal, also said he is considering a middle class income tax cut, likely targeted at people who earn up to $150,000.
Lamont — a Democrat coming off a wide-margin reelection victory and buoyed by a budget surplus and $3.3 billion rainy day fund — said his main priority in 2023 will be promoting economic growth and prosperity and the potential tax cuts are part of that effort.
He also expressed the importance of keeping the state’s fiscal house in order as a precondition to growth, and cautioned that any tax cut proposals will need to be negotiated with the state legislature.
The legislative session is scheduled to begin Jan. 4, and Lamont will deliver his budget, which is still a work in progress, to the General Assembly in February.
“I want to focus everything we do on economic growth,” Lamont told HBJ.
Surcharge
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’s set to expire in a few weeks on Jan. 1.
“The temporary surcharge has been temporary for about 20 years,” Lamont said Monday. “I think probably (it’s time to) let that go back to 7.5%, which is middle of the pack, but I have to negotiate that.”
The Connecticut Business & Industry Association has lobbied against the surcharge for years, and it’s one of the issues the business group will be raising at the state Capitol in 2023.
Middle class tax relief
Lamont and the Democrat-controlled legislature last year approved a record $600 million in tax cuts, including increasing the child tax credit and cutting the maximum car tax rate from 42 mills to 32.46 mills.
Lamont said in 2023 he’s also considering a middle class income tax cut for individuals earning up to $150,000 so people can keep more of what they earn.
He said an income tax cut would be a cleaner, simpler policy than proposing additional rebates or tax credits.
“A middle class tax cut is key to keeping more of what you earn,” Lamont said, making it more likely for people “to get back to work.”
House Republicans noted Tuesday Lamont’s income tax cut plan is similar to what they’ve proposed in the past. For example, in 2021 the House GOP outlined a $1.2-billion tax relief plan that proposed cutting the income tax from 5% to 4% for individuals earning less than $75,000 and joint filers earning less than $175,000 annually.
In June, GOP state lawmakers pitched another slimmed-down $746 million tax cut proposal that would have also reduced the income tax from 5% to 4% on middle class taxpayers.
“It’s gratifying to see the governor recognize that middle income tax relief for families has to be part of the mix when it comes to tax relief,” said Pat O’Neil, a spokesman for House Republicans.
House Minority Leader Vincent Candelora said Republicans will pitch the income tax cut again next session in addition to other possible cuts, including repealing the 1% tax on prepared meals and restoring the pass-through entity tax credit to its original level.
Candelora said the GOP’s focus will be on proposing a tax plan that puts the state in the best possible position with a potential recession on the horizon. He also said he wants to take a close look at the impact inflation is having on the state sales tax receipts, noting higher costs for goods and services is helping Connecticut’s coffers but not residents and businesses.
CNBC earlier this year ranked Connecticut the 39th best state for business. The state received particularly low rankings for its cost of doing business (No. 45 out of 50 states) and cost of living (No. 43 out of 50 states).
Lamont also cautioned that he doesn’t want to jeopardize Connecticut’s strong fiscal position coming out of the pandemic. He said he’d like the legislature to continue the fiscal guardrails — including a volatility cap that limits spending — that were established in 2017.
“What I want to do is make sure I don’t have a fiscal cliff,” Lamont said.
