On February 5, 2025, Governor Ned Lamont released his proposed fiscal year 2026 and 2027 biennial budget. Included within the proposed budget (the “Proposal”) are the following proposed tax changes to Connecticut’s tax system (all of which can be found in Senate Bill 1246):
Personal Income Tax Proposed Changes
- Property Tax Credit: The Proposal would increase the property tax credit against the personal income tax from $300 to $350. In addition, the Proposal would increase the income limits for the credit. Single filers with adjusted gross income of up to $70,000 and joint filers with adjusted gross income of up to $100,000 would qualify for the full property tax credit. There would be a phase-out schedule applying to higher incomes, with no credit available for single filers with adjusted gross income over $130,000 and joint filers with adjusted gross income over $160,000. The Governor’s office estimates that this tax relief would benefit approximately 800,000 filers.
Corporate Income Tax Proposed Changes:
- Corporate Tax Surcharge: The Proposal would extend the 10% corporate tax surcharge for three additional years. The 10% corporate tax surcharge is currently set to expire beginning with the 2025 income year. The Proposal would extend the surcharge for the 2026, 2027 and 2028 income years.
- Capital Base Tax: The Proposal would accelerate the elimination of Connecticut’s Capital Base Tax by 2 years. Under the current schedule, the capital base tax is scheduled to be fully phased out by January 1, 2028. The Proposal would accelerate the phase out by two years, to January 1, 2026, so that the 2025 income year would be the last year of the capital base tax.
- Combined Unitary Reporting Cap: The Proposal would eliminate the current $2.5 million combined unitary reporting cap. When Connecticut converted to combined unitary reporting in 2016, the adopting statute included a provision which provided that the new unitary tax could not increase a company’s tax liability by more than $2.5 million over the tax it would have had without combined unitary reporting. The Proposal notes that, of the 28 states that have adopted some form of combined unitary reporting, none has adopted a cap similar to what is contained in the Connecticut system. The Proposal indicates that fewer than 20 companies are currently benefiting from the cap. The proposal would remove the $2.5 million cap and would be effective January 1, 2026.
- Net Operating Loss (NOL) Deduction: Under current law, companies are permitted to claim a net operating loss (NOL) deduction up to 50% of income (before reduction based on the NOL deduction). However, subject to certain rules, combined groups with cumulative NOLs exceeding $6 billion are permitted to claim a NOL deduction equal to 100% of their income. The Proposal would allow combined groups who surrendered a portion of their NOLs in 2015 to reclaim those surrendered NOLs. The Proposal is intended to remove the tax preference benefit that permits combined groups with cumulative NOLs exceeding $6 billion to fully deduct these losses from their taxes, bringing combined groups in line with other corporations, who are restricted to a 50% deduction for NOLs. This would be effective January 1, 2026.
- Interest Waiver: The Proposal would waive interest on underpayments made as a result of retroactive tax changes made pursuant to the tax proposals.
Tax Credit Proposed Changes:
- Film Production Tax Credit: The Proposal would reduce the top film production tax credit rate from 30% to 25%. Currently, the following rates apply for expenses that are incurred: 10% for expenses between $100,000 and $500,000; 15% for expenses between $500,000 and $1 million; and 30% for expenses over $1 million. The Proposal would reduce the top rate on the film production tax credit from 30% down to 25%. The change would be effective January 1, 2026.
- R&D Credit Exchange Rate: The Proposal would increase the R&D credit exchange rate from 65% to 90% for biotech companies. Currently the R&D credit exchange allows biotech companies with less than $70 million in sales to exchange their unused R&D Tax credits with the State of Connecticut at 65% of their value. Unlike other state tax credit programs, these credits cannot be sold to third parties. The proposal would increase the exchange rate for biotech companies from 65% to 90%. The proposal would be effective January 1, 2025.
- Digital Animation Tax Credit: The Proposal would eliminate the digital animation tax credit. No credits have been issued under this program since September of 2016.
In order for any of the Proposals to become law, they will need to first be adopted by the Connecticut Legislature, the likelihood of which at this point in time is unknown. We will monitor the status of the Proposals, and any other tax proposals over the next several weeks leading up to the end of this year’s legislative session on June 4, 2025. In the meantime, if you would like to discuss any to the Proposals, please feel free to reach out to any member of Shipman’s State and Local Tax Practice Group.