Payroll Tax Proposal

In January 2019, the Connecticut School Finance Project released a proposal for a new state payroll tax that would serve as a partial replacement for the state income tax and help reduce individual and business tax burdens as well as mitigate the impact of recent federal tax changes on Connecticut taxpayers.

Further details about this proposal can be found by clicking on the following three links and by exploring this webpage. For questions about the proposal not addressed on this page, please contact us at info@ctschoolfinance.org.

Benefit 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. Connecticut wage earners would save at least $1 billion under this proposal because it would limit increases in their adjusted gross incomes (AGIs) for federal tax purposes, resulting in a reduction in their federal tax liability and an increase in take-home pay. The implementation of the payroll tax would also be paired with a reduction in state income tax rates on wages.

Additionally, the implementation of a payroll tax would 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 residents pay 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.

Benefit to Connecticut Businesses

In addition to benefiting wage earners, the payroll tax proposal also benefits Connecticut’s businesses. While the payroll tax does technically transition the responsibility of paying the tax from employees to employers, it does not increase the overall tax burden on Connecticut businesses — in fact, it reduces it.

Connecticut employers would accrue at least $600 million in estimated savings under the payroll tax plan by limiting increases in their federal FICA (Social Security and Medicare) tax liability on wages paid to employees. Additionally, the payroll tax would be deductible by businesses as an expense on their federal tax returns.

Payroll Commission

The Connecticut General Assembly, along with agencies from the state's executive branch of government, are currently examining the payroll tax proposal. Section 385 of Connecticut's biennial state budget for fiscal years 2020 and 2021 established a bipartisan Payroll Commission to evaluate the payroll tax proposal and its feasibility. The first meeting of the Commission occurred on Wednesday, July 31, 2019. More information about the Payroll Commission, along with the budget language establishing the Commission and its duties, can be found here.

Agendas, presentation materials, and other information about the Payroll Commission can be found on the Commission's webpage.

Media Coverage of the Payroll Tax Proposal

Below is a collection of media coverage about the payroll tax proposal.