In response to President Donald Trump’s tax bill that limited state and local tax deductions – known as SALT deductions – Connecticut developed a novel way to allow business owners to avoid getting hit with higher federal income taxes.
Businesses that operated as “pass-through” entities, which allowed business income to be taxed at Connecticut’s personal income tax rate, were allowed to become corporate entities taxed at a higher rate, but Connecticut would credit back the business 93 percent of the difference.
Since corporate taxes paid by the businesses could be counted toward federal tax deductions, the business owners would essentially be made whole and side-step the SALT cap.
Although the work-around is in its infancy, Connecticut is one of the few states that have, thus far, not received opposition from the Internal Revenue Service.
But, according to early reports on the budget deal reached between Gov. Ned Lamont and Democrat leaders, the budget will cut the credit to businesses from 93 percent to 87 percent to add $50 million to the budget.
Lamont claims his new budget doesn’t raise tax rates on anyone, but the SALT skim means pass-through businesses will have to pay more.
“It is an unabashed, unquestionable income tax increase on every single business owner across the state of Connecticut that acts as a pass-through entity,” said Rep. Christopher Davis, R-Ellington, who serves as ranking member on the Finance, Revenue and Bonding Committee.
“They’re reducing your income tax credit you would receive,” Davis said. “Every single person who has a pass-through entity is going to be paying a little bit more in their income taxes in Connecticut.”
Democrats see the SALT credit skim as a win-win, noting businesses will still be saving on their federal taxes.
Businesses, on the other hand, see it as a tax increase that will affect primarily small business owners.
“This is aimed directly at Connecticut’s small businesses,” said Eric Gjede of the Connecticut Business and Industry Association, “and I’m really concerned about what Connecticut is going to look like when the dust settles after June fifth.”
The Connecticut chapter of the National Federation of Independent Businesses is also pushing back against the measure, encouraging members to contact their lawmakers and urge them to reject the skim.
Progressive lawmakers, who have been pressing the governor to raise taxes on the wealthy either through the income tax or a capital gains tax – both of which have reportedly been discarded in the latest budget – say the SALT skim will really only affect wealthy business owners.
“They clearly have no understanding of what this proposal does, and I strongly urge them to talk to the businesses in their district, so they can better understand that,” Gjede said.
Davis says there is no way for lawmakers to know the income ranges of businesses affected by the credit reduction because the pass-through reform just took place and most businesses that pay quarterly taxes were given an extension to change their filing status.
“There’s no way to know how it breaks down,” Davis said.
The SALT skim would not be the first time Connecticut offered tax refunds or credits with one hand and then took them away with the other.
Gov. Dannel Malloy implemented a healthcare provider tax on hospitals designed to garner more Medicaid and Medicare dollars from the federal government, promising those extra taxes would be returned to the hospitals.
Over the course of several years, lawmakers kept hundreds of millions of those funds to balance budgets.
The Connecticut Hospital Association eventually filed suit, although Lamont – whose initial budget relied on $515 million from the hospital tax — announced he has reached an agreement with the hospitals to settle.
Although details of the budget deal have not yet been released, both the governor’s budget and the budget originating out of the Finance, Revenue and Bonding Committee kept in place a corporate surcharge meant to expire this year.
Although technically not a tax increase, the continuation of the 10 percent surcharge or corporations is estimated to bring in $60 million in 2020 and $37.5 million in 2021.
Gjede says the budget proposals keep “so many taxes that were set to go away,” including the corporate surcharge.
“It’s really tough to look at this tax package and say there’s no tax increases at all,” Gjede said.