Going Retro, Tax Style

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

When the General Assembly passed the budget, they passed the highest tax increases in Connecticut’s history. And the personal income tax hike is retroactive – most taxpayers now owe 7 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. 

“Most of my constituents knew that the tax hikes were coming. I’m frustrated as they are that we have to raise taxes. But it is what it is,” said state Rep. James Albis, a Democrat representing East Haven in the 99th House District. “Some people wondered why there is the retroactive hike. I had to explain fiscal year different than tax year.”

Once on the books, a tax hike tends to stick, area legislators said. But when people see the bigger tax bite taken out of their paychecks they will likely raise a ruckus.

“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.”

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 and less are now taxed. And the maximum property tax credit was reduced from $500 to $300.

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

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

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

Also those filing joint returns of $700,000 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, and 5 percent on the next $680,000.

“I haven’t really heard from constituents,” said state Rep. Kim Rose, a Democrat representing Milford in the 118th House District. “I honestly haven’t gotten any phone calls or emails. I think it’s because there’s a lot of confusion about how it’s going to affect them.”

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 and $700,000, the recapture works to eliminate $150 of lower bracket benefits for every $10,000. That means joint filers will pay an extra $4,500. Joint filers earning $700,000 or more will pay an extra $12,300.

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.

“The ripple effect is amazing,” state Rep. Laura Hoydick, a Republican representing Stratford in the 120th House District, said. “And when you do it in such a short amount of time it doesn’t give people a lot of time to adjust. They are dismayed, they are disgusted.”

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 ten highest tax states in the country in the share of income paid in state and local tax by its poorest 20%, though its wealthiest 1% pay 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 budget is not only disappointing and fails to make government more efficient; it represents a callous disregard for our struggling middle class. Connecticut has become an embarrassing example on a national level of how not to solve a budget crisis,” state Rep. Vincent Candelora, a Republican representing East Haven, North Branford, and Wallingford, in the 86th House District said in a press release. “In hoisting all of these taxes onto the people, state leaders have merely shifted our job of balancing a budget, onto the struggling middle class.”