2015 has been a tumultuous year for Connecticut taxpayers. It started with projections of large state budget deficits for the 2016 and 2017 fiscal years and the adoption of of the second largest tax increase in Connecticut history (only four years after the adoption of the largest such tax increase). By year end, executive branch and legislative branch leaders conceded that errors were made as part of the budget-setting process, and a special session was convened in December to address a growing projected deficit for the current fiscal year and severe criticism by the business community of the biennial budget.

The tax law changes enacted during the year are plentiful and will have an adverse impact on many taxpayers. Corporations face an extension of the 20% surcharge, a limit on the use of net operating losses, a further limitation on the use of tax credits and, in 2016, a new combined unitary reporting requirement and single-factor apportionment formula. High income individuals face two higher marginal tax rates, middle income taxpayers may realize a reduction in, or the loss of, the property tax credit, and lower income individuals will suffer a delay in the planned increase in the earned income tax credit. Changes to the sales tax include the repeal of an exemption for clothing and footwear costing less than $50, a new tax on website creation and hosting services, an increase in the luxury sales tax rate and a limitation on the clothing and footwear that can be purchased tax free during the third week in August. The ability of hospitals to claim tax credits against the hospitals tax has been limited, and a new gross receipts tax is imposed upon ambulatory surgical centers.

In late June 2015, the day after the budget implementation legislation was enacted, the State Comptroller conceded that the 2014-2015 fiscal year ended with a deficit, ultimately requiring $113.2 million to be drawn from the state’s rainy day fund. Subsequently, the nonpartisan Office of Fiscal Analysis issued a chilling report, projecting a $254.4 million deficit for the current 2016 fiscal year (after the application of $102 million in budget rescissions previously announced by the Governor), a $552 million deficit for the 2017 fiscal year, a $1.72 billion deficit for the 2018 fiscal year, a $1.87 billion deficit for the 2019 fiscal year and a $2.2 billion deficit for the 2020 fiscal year. In response, in October Governor Malloy convened bipartisan meetings to address the projected deficit for the current fiscal year and the concerns of the business community, and then called for a special session of the General Assembly. During the resulting December Special Session, the General Assembly enacted a measure that attempts to address the current fiscal year projected deficit, while affording some tax relief to business taxpayers. The tax relief includes a new cap on the additional tax that a combined group would have to pay under the new combined unitary reporting regime (when compared to the current separate return regime), increased flexibility in the use of certain tax credits, and an exclusion from the Connecticut personal income tax for nonresident employees who render personal services in Connecticut, but are in the state no more than 15 days during the calendar year.

Despite the significant tax increases enacted this year, Connecticut taxpayers still face great uncertainty as to the future. The December Special Session did not tackle the broader budget and structural issues that underlie the large budget deficit projections for future fiscal years, leaving taxpayers to speculate as to what tax increases and other revenue-generating measures may be adopted during the next or subsequent legislative sessions. Hopefully, state leaders will act promptly to address such uncertainty so that businesses and individuals can plan properly for the future.

This Alert summarizes Connecticut tax legislation enacted, court decisions rendered and administrative guidance published by the Connecticut Department of Revenue Services (“DRS”) during 2015.  Please contact any member of our State and Local Tax Practice Group if you have any questions regarding the new tax law changes or how they affect you and your business.