State About To Take More Out Of Paychecks

Grab those calculators – the state will soon begin taking an extra large bite out of taxpayers’ paychecks. 

When the General Assembly passed the budget, it included the highest tax increases in Connecticut’s history. The personal income tax hike is retroactive – most taxpayers now owe seven months of back taxes. 

Starting Aug. 1, taxes will be withheld at new, higher rates. The state will also collect the back-taxes due from Jan. 1 through July 31, 2011. In other words, for the first five months of the new rates – from August through December – wages will be withheld at more than twice the amount. 

“Last weekend I was at a neighborhood barbecue and people came up to me asking ‘Really? Retroactive?’ You had to make it retroactive?’” said State Rep. Kim Fawcett, a Democrat representing Fairfield and Westport in the 133rd House District. “That’s not just government putting the knife in, but turning it.”

State Rep. James Crawford, a Democrat representing Clinton in the 35th House District called the retroactive timeframe the most effective way to use the tax. 

“By doing it now it will have an impact far greater than if we had waited,” Crawford said. 

Once on the books, a tax hike tends to stick, said state Rep. Gail Lavielle, a Republican representing Wilton and Norwalk in the 143rd House District. 

“People are going to be in shock,” Lavielle said. “I’ve gotten a slew of e-mails everyday from people who are concerned.” 

Constituents also worry about the confluence of the income tax hike with newly-enacted sales taxes and reduced property credits. For example, clothing and footwear that retails for $50 dollars and less are now taxed.  The maximum property tax credit was also reduced from $500 dollars to $300 dollars.

People may very well postpone major and minor purchases, Lavielle said.

Indeed, some local retail stores are already seeing signs of acquisition aversion. 

“People are very surprised. The T-shirts, the socks – those are things that were never taxed. And they’re disappointed,” Robert Mallozzi, owner of Bob’s Sports in New Canaan said. “It’s [the state] kind of nickel and diming.”

State Rep. Elissa Wright, a Democrat representing Groton in the 41st House District, said she has received some calls from citizens who are unhappy with the sales tax increases, but she said it could have been worse. 

“The final adopted budget addresses many constituent issues raised in reaction to the governor’s proposed budget,” she said.

According to the Connecticut Business & Industry Association, the catch-up provision of the income tax increase shocks most residents. And the reduced spending power of state consumers combined with lower income for business people paying personal income taxes could hurt Connecticut's economy. 

“I’m hearing from many small businesses whose owners don’t know what to do because they haven’t heard from the Department of Revenue services,” state Rep. Brenda Kupchik, a Republican representing Fairfield in the 132nd House District, said. 

Until Aug. 1, three tax brackets divided the state; 3 percent, 5 percent and 6.5 percent. The new legislation added a 5.5 percent and a 6.7 percent bracket. 

The 3 percent bracket will be eradicated for certain income levels. Instead it will be replaced with a 5 percent bracket. Included in this are residents earning more than $100,500 dollars and filing jointly, those filing singly and earning $56,500 dollars, those filing as head of household and earning $78,500 dollars, and those earning $50,250 dollars married filing separately. 

Also those filing joint returns of $700,000 dollars or more will now pay 6.7 percent on all income. Before the budget passed they would have paid 3 percent on the first $20,000 dollars, and 5 percent on the next $680,000 dollars. 

That the estate tax, also retroactive, simply adds to the tax hike kerfuffle. 

“That’s particularly despicable,” state Rep. John Frey, a Republican representing Ridgefield in the 111th House District. “For someone who died earlier this year, and all their affairs taken care of – now family are told they owe even more money.” 

The tax hike also includes a “recapture” of benefits of lower brackets, according to the Office of Policy Management. For those earning between $400,000 dollars and $700,000 dollars, the recapture works to eliminate $150 dollars of lower bracket benefits for every $10,000 dollars.

That means joint filers will pay an extra $4,500 dollars. Joint filers earning $700,000 dollars or more will pay an extra $12,300 dollars. 

For some organizations, the tax increases have a silver lining. 

According to a May 2011 Connecticut Voices for Children report, Joachim Hero, MPH and Shelley Geballe, JD, MPH said the changes will “start to rebalance Connecticut’s currently regressive system of state and local taxes by reducing taxes on many of Connecticut’s lower-income residents (through the EITC) while modestly increasing taxes at higher incomes.

Connecticut ranks among the top 10 highest tax states in the country in the share of income paid in state and local tax by its poorest 20 percent, though its wealthiest 1 percent pays a smaller share of their incomes in state and local taxes than in most other states. 

Of course, the new tax hike means more paperwork. The state’s Department of Revenue Service published a new eight-page tax table and four pages of revised withholding rules for employers. 

But then starting January 2012 taxpayers will need to re-do their withholding rules to subtract the retroactive calculations. 

“This combined with all the sales taxes gets into one big ‘uh-oh.’ A retroactive tax hike is questionable policy at best,” state Sen. John Shaban, a Republican representing Easton, Redding, and Weston in the 135th House District, said. “It's the fairness of it. It doesn’t give you a chance to plan your life.” 

Wright said that the adopted budget plan puts the state on sound footing. 

“It’s an honest budget and I think that in itself will improve the health of our public finance system and the health of our economy in general,” she said. 

“It was one of the only ways to close that gap and it was fair across the board,” said Crawford. “It’s unpleasant but it’s a reality that has to be dealt with.”