Malloy vetoes tax credit for pass-through entities

Connecticut Gov. Dannel P. Malloy addresses the House and the Senate as the legislative session ends at the state Capitol last month. Malloy vetoed a bill Wednesday evening that would allow pass-through entity businesses to apply a manufacturing tax credit to their personal income taxes. less Connecticut Gov. Dannel P. Malloy addresses the House and the Senate as the legislative session ends at the state Capitol last month. Malloy vetoed a bill Wednesday evening that would allow pass-through entity ... more Photo: Jessica Hill / Associated Press Photo: Jessica Hill / Associated Press Image 1 of / 1 Caption Close Malloy vetoes tax credit for pass-through entities 1 / 1 Back to Gallery

Gov. Dannel P. Malloy vetoed a bill Wednesday evening that would allow pass-through entities to apply a manufacturing tax credit to their personal income taxes, saying it would give large companies a new tax cut and remove needed revenue.

Lawmakers will reconvene in a few weeks to decide whether to override Malloy’s veto on this bill and one other he has nixed so far this year. Support from two-thirds of legislators in both chambers would be needed.

The bill, which unanimously passed two legislative committees as well as the full House and Senate, was intended to help small businesses. But Malloy said he doubted it would have that effect.

“The United States Department of Treasury recently revealed that only about 10 percent of pass-through entities were small businesses with employees,” Malloy wrote in a letter explaining his veto. “While this bill may have been passed to help small-business owners, it would also allow owners of large, complex institutions to greatly reduce their personal income tax liability without limits.”

Malloy also objected that the loss in revenue this bill would produce — $650,000 annually — was not accounted for in the Legislature’s $20 billion bipartisan budget deal passed in May.

State Sen. Scott Frantz, chair of the legislature’s Finance Committee, said $650,000 a year is a small price to help keep businesses in the state — especially compared to the $81 million package of grants and loans the state Bond Commission passed last week to expand businesses and create jobs.

“It is very, very shortsighted of the governor to veto this bill,” the Greenwich Republican said. He called it a “hugely positive” step for keeping manufacturing companies in the state and for the economy at large.

Speaker of the House Joe Aresimowicz, a Democrat, said in a statement he believes the Legislature would have the votes to override the veto. “We need to continue to up our investment in job creation and economic growth, and advanced manufacturing is a fast-growing area that is looking to hire every day, but there is a shortage of skilled workers ready to go,” he said.

The Legislature’s Republican leaders, Rep. Themis Klarides of Derby and Sen. Len Fasano of North Haven, said in a statement they intend to pursue an override.

A pass-through entity is a special business structure not subject to federal income taxes. Under current Connecticut law, pass-through entities can earn a manufacturing-apprenticeship tax credit from the state, but cannot apply it to their personal income taxes. Instead, these businesses can sell or transfer their tax credit to other companies, which may reduce their tax liability.

The vetoed bill, which would have taken effect for 2018 taxes, would have allowed the owners or partners of S corporations, LLCs and other pass-through entities to apply the credit directly to their personal income taxes.

emunson@hearstmediact.com; Twitter: @emiliemunson