On February 8, 2023, Governor Ned Lamont presented Connecticut lawmakers with a $50.5 billion two-year budget that called for more than $500 million in tax relief to Connecticut taxpayers. At this point it is unclear how much of the Governor's tax cut proposals will be adopted by the Legislature, but since the Democrats control both the House and the Senate, it is likely that a substantial portion of the proposals could become law. A summary of the most significant proposals follows:
INDIVIDUAL TAX CHANGE PROPOSALS
Reduction in the Personal Income Tax Rates. For tax years commencing on or after January 1, 2024, the two lowest personal income tax marginal rates would be reduced as follows: the rate on the first $10,000 of Connecticut taxable income for a taxpayer filing as an unmarried individual or a married individual filing separately ($20,000 for married individuals filing jointly) would be reduced from 3% to 2%, and for income greater than $10,000 but less than $50,000 ($100,000 for married individuals filing jointly), the rate would be reduced from 5.0% to 4.5%. For a resident filing as the head of household, the tax rate for the first $16,000 would be reduced from 3% to 2% and for income greater than $16,000 but less than $80,000 the rate would be reduced from 5% to 4.5%.
Increase to the Earned Income Tax Credit. The proposal would increase the Earned Income Credit from 30.5% to 40% of the federal earned income tax credit. This proposal would be effective for tax years commencing January 1, 2023.
Repeal the Cannabis Expansion of the Angel Investor Tax Credit. This proposal would eliminate the expansion of the Angel Investor Tax Credit for investments made in cannabis-related businesses. The Angel Investor Tax Credit provides a tax credit against the personal income tax of 25% of investments made in businesses related to bioscience, advanced materials, photonics, information technology, or emerging technology. In the 2021 legislative session, the tax credit program was expanded to specifically include investments made in cannabis-related businesses and the amount of the tax credit for such investments in cannabis-related businesses was increased from 25% to 40% of the investment. Under the Governor's proposal, the Angel Investor Credit against the personal income tax wouldd be revised to exclude investments made in a qualified cannabis-related business, beginning July 1, 2023.
BUSINESS TAX CHANGE PROPOSALS
Extension of the Corporate Surcharge Tax. A 10% surcharge on the corporate tax, which was set to expire for income years commencing after December 31, 2022. However, under the Governor's proposal, the 10% surcharge would be extended for three additional years (i.e the surcharge would be applicable for years commencing prior to January 1, 2026). The surcharge will continue to not apply to companies (1) with less than $100 million in annual gross revenues (unless the taxpayer is a taxable member of a combined group that files a combined unitary return) or (2) whose tax liability does not exceed the $250 minimum tax. The surcharge is on top of the existing 7.5% corporate tax rate. Corporations will not be required to pay installment payments of estimated tax on the 10% surcharge for the 2023 year until the proposal is enacted as law.
Expansion of the Human Capital Investment Tax Credit. The proposal would expand the human capital investment tax credit. For tax years beginning on or after January 1, 2024, the proposal would increase the tax credit from 5% to 10% for qualifying expenses relating to human capital investment.
Credit for Childcare Subsidies. The proposal increases the tax credit earned for expenses related to childcare subsidies and the development of a childcare center from 5% to 25% for tax years beginning on or after January 1, 2024. In addition, the proposal increases the statutory limitation on the amount of the credit that can be taken from 50.01% to 70% of the corporate tax liability for tax credits earned for childcare subsidies and the development of childcare centers.
Pass-Through Entity Tax Credit Increase. For tax years commencing on or after January 1, 2024, the proposal would increase the amount of Connecticut's Pass-Through Entity Tax (PET) credit rate to 93.01% (which would return the amount of the credit to what it was when the PET was originally adopted in 2018). The current pass-through entity tax credit rate is 87.5%. Currently Connecticut is the only state in the country that has a mandatory PET. However, the proposal would change the mandatory nature of the PET and provide the pass-through entity with the right to make an annual election as to whether to be subject to the PET for each year. The pass-through entity would be required to make such election annually by the due date of its tax return including extensions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.