Gov. Ned Lamont unveiled a proposal Wednesday to cut taxes on more than 120,000 small and mid-sized businesses, saving them collectively as much as $60 million annually starting in 2024.
Lamont will ask legislators to pare back the Pass-through Entity Tax, a levy created in 2018 to help business owners work around a new $10,000 cap on state and local tax deductions within the federal income tax system.
“These changes we are proposing will help small businesses in Connecticut save money, which they can use to reinvest back into their establishments to support their continued growth and the development of new jobs,” Lamont said. “By making this change, we can provide confidence to businesses that they can receive the full benefit of this tax credit.”
The businesses Lamont wants to help commonly are referred to as pass-through entities. These involve limited liability corporations and other businesses that don’t pay the state corporation tax. Instead, the business earnings “pass through” to the owners, who then pay personal income taxes on them.
Exploiting a string of surpluses and a full rainy-day fund, the proposal is the first of several Lamont intends to roll out before submitting his full tax-and-spending plan to the General Assembly on Feb. 8, the prime one being a middle-class tax cut.
Lamont, who won an easy reelection in November with a campaign centered on fiscal discipline, said any spending increase or tax cut that legislators seek must be sustainable over the long term, providing stability to families and businesses.
“What I don’t like is, ‘Hey, let’s eliminate the tax or get rid of it. Oh, two years later, we got to add it back.’ That is a psychological hell for families and small businesses. I’m not gonna let that happen,” Lamont said.
Lamont made the announcement at Express Kitchens in the North End of Hartford, a minority-owned business and a favorite venue for Democrats making business proposals. Reinforcing Lamont’s message was the company’s owner, Max Kothari, who said the tax relief was a consequence of the governor’s fiscal discipline.
Helping small businesses deal with new federal tax limits
When Congress and former President Donald Trump imposed new limits on the state taxes that can be deducted on some federal returns, Connecticut and several other blue states revised their state income tax systems to help small and mid-sized businesses find relief.
Here’s how it works: For years, many small businesses paid up to 6.99% on their business earnings through the state income tax. Starting in 2019 they also paid a 6.99% entity tax to Connecticut on the same earnings.
At first glance it appears to be double taxation, but it’s not.
Connecticut allowed these owners to claim a credit against their personal state income tax obligations — a credit equal to 93% of the pass-through entity taxes paid.
The big benefit from this back-and-forth arrangement comes when these business owners file their personal federal income tax returns.
Allowing these owners to report their businesses’ earnings through a separate state tax thereby reduces the personal income they would report on their federal return. It helps them to secure a federal tax break — larger than the extra state taxes owners had to pay — despite the federal cap on deductions.
But one year after this new system had been created, state legislators and Lamont scraped back more of this savings for state government, reducing the credit business owners could claim on state income taxes from 93% of the business entity taxes paid to 87%.
But since 2020, the state’s collections from the pass-through entity tax have surged by 70%, rising from $1.15 billion to a projected $1.96 billion this fiscal year.
The governor’s proposal released Wednesday would restore the 93% credit level.
Joining Lamont at the news conference was Chris DiPentima, the president and CEO of the state’s largest trade group, the Connecticut Business and Industry Association. The governor’s proposal was high on CBIA’s wish list.
DiPentima said 93% of the association’s members have 100 or fewer employees, and most can benefit from the tax change.
“So that’s why it’s been such a big priority for us and one of our top priorities in our transform Connecticut package,” DiPentima said, referring to the association’s legislative priorities published before the election.
CBIA also is pushing for the administration offer incentives for building workforce housing on former brownfield sites and in opportunity zones.
Lamont, a former businessman from Greenwich who lobbied Wall Street and the broader business community to reassess its view of Connecticut, said he was intent on establishing a reliable trajectory for growth in a state that has struggled over decades to grow its workforce and tax base.
“This is the first time where I think we’re going to be able to show across the board for small businesses, as well as middle-class families, directionally where we’re bending the curve, so to speak, on taxes,” he said.
Lamont declined to outline his view of how much tax relief Connecticut can afford in the coming fiscal year.
“Probably not as much as many people would like, but we’re just getting started,” Lamont said.
Lamont acknowledged he will be pressed to do more.
“What I’m doing is a middle-class tax cut. You can’t do everything,” he said.
Lamont said he also would maintain the modest expansion in the earned income tax credit made in 2021, a benefit to lower-wage workers.
Connecticut’s credit increased from 23% to 30.5% of the federal EITC. That means an extra $34.1 million annually, or about $176 each for the roughly 194,000 eligible households, according to the legislature’s nonpartisan Office of Fiscal Analysis.
To qualify for the state credit, a filer must be eligible to receive the federal EITC. Income eligibility limits last year included $53,330 for a couple with two children, $41,756 for a single parent with one child and $15,820 for a single person with no children.
But the EITC is an example of Connecticut’s yo-yo approach to tax relief.
A credit against the state income tax, Connecticut’s EITC was launched in 2011 at 30% of the federal tax break but then was almost immediately scaled back to 27%. And over the past decade, as governors and legislatures struggled with numerous budget deficits, the credit was whittled down to 23%.
Lamont promised Wednesday it will stay at 30%.
“Surely, EITC we’re going to maintain,” Lamont said. “That’s really important. I like things to get people back to work. I like people keep more of what they already earn. EITC is part of that.”
Staff writer Mark Pazniokas contributed to this report.