🔒The good, bad and uncertainty of CT’s $43.4B budget

Does the recently passed $43.4 billion state budget have your head spinning?

If it does, that’s not surprising given the complexity of the two-year spending plan.

Are businesses winners or losers in this budget? I guess that’s in the eyes of the beholder, but overall a number of businesses will see higher costs and/or fees and there’s no significant new tax breaks, although policymakers did eliminate the pesky $250 business entity tax companies must pay every other year. However, they also increased the registration fee by $60, so the actual savings is basically chump change.

In adopting the budget, state lawmakers had to figure out how to close an estimated $3.7 billion deficit over two years. To get there they avoided an income tax increase, but still raised hundreds of millions of dollars in new tax revenues by broadening the sales tax and increasing other taxes and fees on businesses.

Is Connecticut poised for economic growth under this budget? Well, I certainly wouldn’t describe it as an economic stimulator because it takes more money out of people’s pockets and does little to boost the state’s cost competitiveness.

Overall, I’d argue lawmakers didn’t do enough to rein in spending, especially from state employees.

Still, it could have been worse given Connecticut’s fiscal condition.

Here’s an initial take on the good, bad and uncertainty created by this new state budget.

The Good

Maybe the best news in the budget is that lawmakers are projecting higher-than-expected revenue collections from state income taxes, casinos and other places, which shows the strong U.S. economy is having a positive impact on Connecticut, even though the state lags the rest of the nation in job growth.

That helped reduce the overall budget hole lawmakers needed to fill.

The budget also leaves in place the state’s $2 billion rainy day fund, which may actually grow in the years ahead. That will be an important cushion should the next recession hit anytime soon, or if budgetsetters’ revenue projections are too rosy.

Lawmakers also didn’t increase the income tax or adopt a capital-gains surcharge, which means the state will maintain one of its few competitive edges over its high-tax neighbor, New York.

Hospitals may be getting some relief from a state tax that has cost the industry hundreds of millions of dollars in recent years, but the details are still murky.

The state’s angel-investor tax credit has also been extended for five years, while the capital-base tax, a nuisance to the state’s bioscience startups, is now scheduled to be phased out.

The Bad

The budget over two years raises about $705 million in new tax revenues or fees from various sources.

Several exemptions from the state’s 6.35 percent sales tax have been lifted so it will now cost more to park, get your clothes dry cleaned or renovate your home. The sales tax on digital downloads has increased from 1 percent to 6.35 percent and stores will now be required to charge a dime for every plastic bag you use.

Restaurants and other prepared-food establishments will see their 6.35 percent sales and use tax increase by 1 percentage point.

There is also a new “mansion tax” surcharge on home sales valued at more than $2.5 million.

The biggest gripe from businesses — besides the minimum-wage hike and paid family medical leave laws, which were passed but not part of the budget — is the reduction of a pass-through entity tax credit that will cost small and midsize employers $50 million annually.

Large employers got hit too because lawmakers once again cancelled the phase out of the corporate tax surcharge. There are also some new tax credit restrictions and eliminations.

Finally, there was a lackluster attempt at cutting spending and reducing the size of state government, though the governor’s office tells me they will be rolling out several initiatives this summer that will reduce expenses and improve efficiencies within state agencies. We’ll see.

One of the biggest cost savings essentially comes from a refinancing of the teachers and state employees pension funds that will stretch out taxpayer contributions for years.

The Uncertain

The biggest uncertainty around the state budget is whether or not it’s actually balanced. Only time will tell if it is, but I have a hunch it will require lawmakers to tap a portion or all of the rainy day fund.

Tolls is another uncertainty. Lawmakers could meet in special session later this summer to vote on tolls, which would present a major tax increase to businesses and residents alike.

Finally, tucked away in the budget is a mandate for the Department of Revenue Services to study the adoption of a payroll tax that could one day eliminate the income tax. Employers should keep an eye out for that potential major reform in 2020 or later.