The two year budget plan which Gov. Ned Lamont will propose to the legislature next month will include a provision boosting the state’s pass-through entity tax credit, a move that will enable business owners to claim about $60 million more in tax deductions, he announced Wednesday.
Lamont and several of his agency commissioners detailed the proposal during an event at Express Kitchens in Hartford’s north end. The provision will restore to 93.01% the state’s pass-through entity tax, resulting in a tax break for an estimated 123,000 businesses.
“Small businesses, LLCs, Sub S [corporations], these are the guys that got hammered when the federal government, in their wisdom, capped what we could deduct in terms of SALT, which is state and local taxes,” Lamont said.
The tax, passed in 2018, was designed as a benefit for the business owners it impacts, allowing them to claim state and local tax deductions which they became ineligible for as a result of federal tax changes made in 2017. While the federal law capped the personal income tax deductions of business owners, the pass-through entity tax shifted the burden onto the business and allowed business owners to claim a deduction on their federal income tax return.
Connecticut was the first state to offer such a credit, however, soon after its passage, Lamont and the state legislature reduced the tax credit from around 93% to 87.5%, leaving businesses owners on the hook to pay more of their personal income taxes.
Jeffrey Beckham, Lamont’s budget chief and head of the Office of Policy and Management, said the change would cost the state about $60 million in lost revenue.
Lamont wants to allow business owners to decide whether they will take the credit as part of their personal income taxes or their business taxes.
State business leaders lauded the proposal. Chris DiPentima, president and CEO of the Connecticut Business and Industry Association, said the restoration of the pass-through entity tax was among his group’s top priorities.
During the press conference, Max Kothari, CEO of Express Kitchens, said the change would result in tax savings of about $4,823 on one of his businesses.
“It is a direct benefit of reduction of taxes for us,” Kothari said.
Wednesday’s announcement was the first concrete budget proposal offered by Lamont ahead of his budget address next month. The governor has also called generally for a middle class tax income tax reduction aimed at families making less than somewhere around $200,000 a year. He did not yet have any additional details to offer on that proposal.
As the governor’s administration works to prepare a two-year budget proposal amid estimates that the state will be working with a $3.1 billion surplus, the Democratic controlled state legislature will also draft its own fiscal priorities as the state surplus.
Last month, Senate President Martin Looney said legislative Democrats will also be looking to provide additional tax relief. However, Looney mentioned priorities like making permanent a one-time child tax credit offered last year and sustaining the Earned Income Tax Credit at its current level.
Lamont told reporters he supported maintaining the current EITC levels. He was less enthusiastic about the child tax credit.
“It was a little cumbersome,” Lamont said of last year’s child tax credit rollout. “We wanted to get the rebate out, we wanted to do it on a timely basis. At the end of the day we were knocking on doors trying to get people. I just think that a middle class tax cut helps out the same people. It’s quick, it’s easy and it gets you the money.”
Republicans welcomed Lamont’s pass-through entity tax proposal. In a statement, House Minority Leader Vincent Candelora said the announcement mirrored Republican proposals and reversed a change made by Democrats in 2019.
“It’s my hope that the combination of his proposal and our caucus bill to restore the pass-through entity tax credit will generate momentum within the General Assembly and get this done for taxpayers and the small business community,” Candelora said.