The Connecticut Office of Policy and Management is searching for a vendor who could analyze and model a complicated new taxation strategy that would replace part of the income tax with a payroll tax.
If implemented, the new tax structure could result in employees seeing a pay reduction of 5 percent to make up for the increase in payroll taxes for the employer, but the employee could then see an increase in overall pay through a reduced federal tax liability.
The new taxation strategy is meant to reduce some of the losses Connecticut residents face due to a new cap on state and local tax deductions implemented by 2017 Tax Cuts and Jobs Act.
Gov. Dannel Malloy’s administration estimated the cap would reduce SALT deductions by $10.3 billion for Connecticut residents and increase their federal tax payments by $2.3 billion.
The proposal was put forward by the CT School & State Finance Project in 2019 and the budget included a provision to analyze and study the idea.
The results of the analysis will be considered by a Payroll Commission, which will include the Commissioner of the Department of Revenue Services, the Secretary of the Office of Policy and Management and the co-chairs and ranking members of the Finance, Revenue and Bonding Committee.
The CT School & State Finance Project says the proposal could be a boon to Connecticut taxpayers.
“In short, the payroll tax proposal gives Connecticut wage earners and employers a tax break, paid for by the federal government, by reducing their net state and federal tax liability,” the CT Finance Project wrote.
The organization estimates Connecticut taxpayers would save $1 billion per year in reduced taxes and businesses would save $600 million per year through reducing their payments for social security and Medicare.
The SALT cap elicited outrage from Malloy and former Attorney General George Jepsen filed suit along with other states, alleging President Donald Trump’s administration was targeting high-tax, largely Democrat-led states. The lawsuit was dismissed by a federal court.
The cap also raised concerns that it could exacerbate Connecticut’s loss of wealthy individuals to other states with lower property taxes.
CT School & State Finance’s payroll tax idea received interest from Gov. Ned Lamont and lawmakers on both sides of the political aisle, particularly since it could increase revenues to the state by upwards of $300 million.
Connecticut currently faces a crushing projected deficit of $7 billion over the next few years due to the COVID-19 pandemic and economic downturn.