Payroll for income tax swap raises questions
When a radical plan to replace the state’s income tax with a payroll tax landed in Gov. Ned Lamont’s office earlier this week, his staff set to work vetting the idea.
But even with the Capitol abuzz with the possibility, it’s unlikely to go anywhere during this legislative session with less than a month remaining, several other major proposals on the table and a growing list of questions — but not answers — about what such a drastic change in the state’s tax structure would mean for Connecticut residents.
“(President Donald) Trump’s tax bill, where you can’t deduct state and local taxes, is costing us billions of dollars so we’re trying to find ways to get some of that money back from the feds,” Lamont said after a news conference on infrastructure improvement in Hartford on Friday morning. “It’s a big complicated bill. I appreciate the intent behind it. We’re going to have to study this really hard. We can’t rush it into this cycle.”
Even so, key members of the governor’s policy team, the state’s Office of Policy and Management and the Department of Revenue Services are in the process of vetting the idea, and legislative leaders are discussing the issue with the tax-writing Finance, Revenue and Bonding Committee and plan to meet to discuss the proposal further on Monday.
The plan, written by the nonpartisan Connecticut School Finance Project and first reported by Hearst Connecticut Media, would replace most of the state income tax with a payroll tax, creating a new way to raise capital for the state and providing most of Connecticut’s taxpayers with a break on their federal taxes. While it sounds easy enough, the list of hurdles is long and would likely involve long conversations with the federal government as the plan is essentially a way around the $10,000 cap on a widely utilized personal income tax deduction for state and local taxes known as SALT. And those conversations take time.
“Obviously it involves a whole change in the way we collect revenue,” said state Senate President Pro Tempore Martin Looney, D-New Haven. “It sounds promising as a way to help reduce peoples’ federal taxes as well by reducing income by 5 percent and replace it for many employees. Proponents claim it would be a tax cut for everyone, in theory.”
He said that consequences would include 5 percent reductions in Medicaid and Social Security payments. Plus, negotiated union contracts would have to receive support by public-employee groups.
“You just can’t reduce a union contract by 5 percent. These are complex questions.”
Jared Walczak, a senior policy analyst at the Tax Foundation, a D.C.-based nonpartisan think tank, said the plan is worth considering because no state has ever done it before, but cautioned Connecticut leaders on the risks involved — especially what would happen if the SALT cap is ever lifted or expires.
“Payroll taxes are common, but no one has ever done a high rate payroll tax as an alternative to an income tax before,” Walczak said. “There’s a first time for everything, including good ideas. But this is a major overhaul that is primarily being driven by the goal of federal tax avoidance. It’s a risky proposition unless they can dot all their I’s and cross all their T’s and it doesn’t seem like they’re there.”
New York state launched an optional payroll tax, but Walczak said the only businesses to opt in have been “small operations with exclusively high-income earners” like hedge funds and law firms, where it’s easier to get a small group of people to understand the complexities of cutting their gross salary in order to gain an overall tax cut.
Sen. James Maroney, D-Milford, a member of the Finance, Revenue and Bonding Committee, said he too thinks the idea merits discussion, but as the self-employed founder of Milford-based First Choice College Placement his list of questions is long. It is unclear how the payroll tax would be administered for Connecticut residents who are self-employed.
“It would depend on the way you’re self-employed because if you are paying the pass-through entity tax, which the state created in the last budget to help alleviate the impact of the SALT, you may not then be subject to the payroll tax,” he said. “But I need to check on that.”
After meeting with the Connecticut School Finance Project earlier in the session, Maroney sent the proposal to his father, a retired accounting professor. Maroney’s father sent his son questions about the idea, which the senator passed on to the nonprofit.
“I think our state has been definitely impacted by the elimination of the SALT deduction and so we are looking for ways to help alleviate that burden on our residents,” Maroney said. “If it works, it’s a win-win, where it will help the state and it will give a tax break to residents.”
Another member of the Finance, Revenue and Bonding Committee, Steve Meskers, D-Greenwich, said the proposal to move to a partial payroll tax seems to be “a very good one.” He believes the residents of Greenwich and Fairfield County would appreciate the change because they were hit hard by the change in the SALT cap. Although some of the very wealthy residents in his district would be paying more to the state under this proposal, he believes those constituents would still support it because they would see a net tax savings due to reductions in their federal tax burden.
But Meskers, like other lawmakers, has questions about how the proposal would work: he wants feedback on the idea from municipalities and the state’s biggest employers. He wonders how it would affect people who live in Connecticut and work in another state or vice versa.
“I think I would prefer to see a tax break than no tax break,” he said.