February 20, 2019

Lamont holds tax rates steady, but companies and consumers would still pay more

HBJ File Photo
HBJ File Photo
Connecticut state Capitol in Hartford.
HBJ PHOTO | Steve Laschever
Gov. Ned Lamont.

In his inaugural budget, Gov. Ned Lamont kept campaign pledges not to increase major tax rates, but plenty of businesses, and their customers, can expect to pay higher taxes if the two-year spending plan makes it through the legislative gauntlet in the months ahead.

In terms of new tax revenue that would help close a two-year, $3.7 billion budget deficit, the sales and use tax is one of Lamont's biggest targets. (Hospitals are another)

The Democratic governor proposes to apply the sales tax to approximately 30 categories of transactions that were previously exempt from the 6.35 percent levy, including professional services, which would generate hundreds of millions of dollars in new money for the general fund.

Some of the largest new sources of sales tax revenue over the next two years would include vehicle trade-ins ($122 million), legal services ($107 million in revenue), real estate activities and agents/brokers ($102.4 million), engineering services ($63.8 million), barber shops and salons ($63 million), and non-prescription drugs ($45.4 million). Newspapers and magazines, too, would be hit with the sales tax.

Not included in the proposal is a tax on groceries, which drew heavy criticism after Lamont floated it several weeks ago.

"This does not include a tax on groceries," Lamont's budget director Melissa McCaw, secretary of the Office of Policy and Management, said on Wednesday morning. "I'll say it again: No tax on groceries."

However, it does include an increase in the hotel occupancy tax, from 15 percent to 17 percent, raising an estimated $35.7 million over the biennium, as well as a promised tax hike on digital downloads, from 1 percent to the standard sales tax rate of 6.35 percent, which is expected to raise $64.6 million in fiscal years 2020 and 2021.

Joseph Brennan, CEO of the state's biggest business lobby, the Connecticut Business & Industry Association, said taxing services would impact many of his members, which would have to collect the tax from their customers. However, he said he was thankful Lamont has also proposed exempting business-to-business transactions from the proposed base-broadening policies. He noted that the legislature has weighed service taxes before.

"This list is not unlike the lists I've seen many times in the past," Brennan said. "We'll just have to have the discussion within the legislature."

Lamont is willing to cede $51.6 million in revenue to repeal the state gift tax and tweak estate tax rules.

Another campaign pledge Lamont kept in his first budget is a repeal of the business entity tax, a $250 fee businesses must pay every two years.

However, he wants to increase an annual filing fee that LLCs and LLPs must pay to the Secretary of the State's Office, from $20 to $100.

Every business must pay those two fees, so the net annual savings would be $45.

Lamont also proposes to make permanent a 10 percent corporation tax surcharge on businesses with more than $100 million in gross revenue, which would generate nearly $98 million over the biennium. The tax is currently scheduled to expire in tax year 2019.

Another corporation tax proposal includes reducing the cap on urban redevelopment and R&D tax credits, which would generate nearly $56 million over the two years.

As expected, Lamont's budget calls for a minimum wage hike, rising from $10.10 to $15 an hour between 2020 and 2023, and employee-funded paid family medical leave.

National Federation of Independent Business Connecticut Director Andrew Markowski said in a statement that his members are pleased Lamont doesn't want to increase income and business tax rates, but said he was sending "mixed messages" with his budget. NFIB is opposed to the minimum wage increase and paid leave proposals, saying "the money has to come from someplace."

Lamont would also add a bottle deposit to containers currently exempt from the state's bottle bill, which has implications for recyclers and manufacturers, who have fought over proposed changes over the years.

The governor would add a 5-cent deposit on 50-milliliter "nip" liquor bottles, and a 25-cent deposit on liquor and wine glass bottles.

Lamont is also calling for a 10-cent tax on plastic bags, a 75 percent wholesale tax on nicotine vapor liquids, and a 1.5-cent-per-ounce tax on sugary beverages.

A campaign promise Lamont has been accused of breaking in recent days is his previously limited support of tolls. Throughout the campaign, Lamont said he supported trucks-only tolling. However, four days ahead of his budget unveil, Lamont penned an op-ed for Hearst Connecticut Media in which he wrote that limited tolling might not be legally feasible and wouldn't raise enough revenue to support transportation investments.

His 2020-21 budget doesn't rely on any toll revenue, since it would take until around 2025 at least to get toll gantries fully up and running, but he did include two "potential paths" to tolling, including a trucks-only system and a "modified congestion tolling" model, which could include 53 gantries (lower than the 82 pitched in a recent Department of Transportation plan).

Lamont said any tolling law must maximize discounts for Connecticut EZ-Pass users and frequent drivers.

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