Deputy Executive Director Lisa Hammersley Submits Testimony to Finance, Revenue and Bonding Committee on Establishing a Payroll Tax

Testimony Regarding S.B. 1143, An Act Establishing a Payroll Tax

Lisa Hammersley, Deputy Executive Director
Finance, Revenue and Bonding Committee
Monday, April 29, 2019

Chairmen Fonfara and Rojas, Ranking Members Witkos and Davis, and distinguished members of the Finance, Revenue and Bonding Committee:

My name is Lisa Hammersley and I am the deputy executive director of the Connecticut School Finance Project, a nonpartisan, nonprofit policy organization based in New Haven that works to identify solutions to Connecticut’s school and state funding challenges that are fair to students, taxpayers, and communities.

Thank you for the opportunity to submit informational testimony on S.B. 1143, which would establish a payroll tax, and subsequent credit against the personal income tax, for employees earning over $40,000.

My testimony today will focus not on the specific language of S.B. 1143, but on how the State of Connecticut can replace a portion of the state income tax with a payroll tax on W-2 wages to mitigate the negative impacts of federal tax changes on Connecticut taxpayers, and potentially yield more state revenue while reducing the federal tax liabilities of Connecticut residents.

In December 2017, the U.S. Congress passed the Tax Cuts and Jobs Act (TCJA), which made significant modifications to the federal tax code, including implementing a $10,000 limit on a widely utilized personal income tax deduction for state and local taxes (SALT) paid. Prior to the enactment of this cap, taxpayers who itemized their deductions could reduce their federal tax liability by the full value of their paid state and local taxes. This federal tax change is expected to negatively impact taxpayers in Connecticut, which is one of several states with a significant percentage of residents who itemize deductions, allowing them to reduce their tax liability accordingly.

In fact, Connecticut’s Department of Revenue Services has estimated that as a result of federal changes made as part of the TCJA, approximately 170,000 Connecticut taxpayers are projected to lose, combined, an estimated $10.3 billion in state and local taxes that those taxpayers can no longer deduct, resulting in an increased federal income tax liability increase of $2.8 billion.

One potential strategy to mitigate the impact on Connecticut taxpayers of these federal tax changes, in particular the SALT deduction cap, is through the implementation of a payroll tax as a partial replacement for the state income tax.

More information about this concept can be found in the Connecticut School Finance Project’s January 2019 policy briefing titled, Payroll Tax in Response to Federal Tax Changes. This policy briefing is available at

What is a Payroll Tax and How Can it be Used to Reduce Connecticut Taxpayers’ Overall Tax Liability?

Payroll taxes are taxes employees and/or employers must pay based on wages and tips earned and salaries paid to employees. Unlike personal income taxes, which are directly paid by the individual who earned income, payroll taxes are paid by employers to the government.

However, although paid by employers, a payroll tax as a partial replacement for the state income tax would not have an impact on an employer’s tax liability, as all taxes paid by businesses to the government are fully deductible when calculating a business’ tax liability. Furthermore, a payroll tax can be used to reduce payroll expenses for businesses.

If a payroll tax were enacted in Connecticut, employers would presumably reduce employees’ wages by an amount equal to the payroll tax in order to keep themselves whole financially. However, because of the challenges associated with employers attempting to lower employees’ wages, it is recommended the payroll tax be phased in at the rate of cost-of-living (COLA) increases. For example, a five percent payroll tax could be phased in over a two-year period at a rate of 2.5 percent a year. During this two-year period, employers would implement the payroll tax, rather than giving COLA increases, and ultimately reduce their payroll expenses.

The U.S. Department of Labor’s Bureau of National Statistics reported wages and salaries increased by 2.9 percent for the 12-month period from September 2017 to September 2018. If a payroll tax were to be enacted at 2.5 percent per year, for two years, with similar wage growth, employees would realize a wage increase of approximately 0.05 percent with the payroll tax being fully paid for by the employee and no reduction being made to take home pay.

An analysis of how this would work and benefit businesses and employees is available at

Beneficial Impact to Connecticut Residents

The positive financial impact to state taxpayers is not from a reduction in overall state tax liability, rather it is generated by limiting increases in Connecticut residents’ adjusted gross incomes for federal income tax purposes (resulting in a reduction in federal tax liability for Connecticut taxpayers) as well as potentially reducing state income tax rates.

The implementation of a payroll tax would also help to mitigate the impact of the SALT deduction cap on taxpayers who itemize deductions on their federal tax returns. Reducing or eliminating the amount of state personal income tax that is paid by residents to the State means Connecticut residents will be able to devote less of their SALT deduction to personal income taxes and potentially have room under the deduction cap to deduct all or a larger portion of their local property taxes.

Estimates of the tax impact from enacting a five percent payroll tax, with a commensurate reduction in state personal income tax rates, are available in the policy briefing referenced above.

Opportunity to Raise Additional State Revenue

The significant tax break that would be realized by many of Connecticut taxpayers through the implementation of a payroll tax as described above and outlined in the aforementioned policy briefing would also present an opportunity for the State of Connecticut to increase the progressivity of its personal income tax.

Even with an increased overall tax rate, under the described payroll tax, Connecticut taxpayers would still pay less taxes overall, save significantly on their federal income tax liabilities, and reap the potential benefits of mitigating the SALT deduction cap.

While instituting a payroll tax as I’ve described above is a somewhat complicated concept and will require significant modifications to Connecticut’s tax code as well as other considerations, it presents opportunities to lower the federal tax bills of Connecticut residents and save taxpayers money, while still allowing the State to potentially increase the progressivity of its personal income tax and raise additional revenue.

Thank you again for allowing me the opportunity to testify today on S.B. 1143, and I ask the Committee to consider a payroll tax as a way to mitigate the negative impacts of federal tax changes on Connecticut taxpayers, reduce the federal tax liabilities of Connecticut residents, and potentially yield more state revenue.

I am happy to answer any questions you may have at this time, and if you have questions later, please feel free to reach out to me via the contact information below.


Lisa Hammersley
Deputy Executive Director
Connecticut School Finance Project