by Donald Eng
Credit: New Africa / Shutterstock
HARWINTON, CT — Can Connecticut alter its tax code to reduce residents’ federal income tax? A legislative working group is looking into that exact proposal, with a report expected by the end of the year.
“I’ve been fascinated by this idea of payroll tax savings since I first heard about it in 2019; wages are reduced, but taxes are reduced by an even-greater amount, and the result is you get to keep more of your money,” Honig said. “I’ve always thought this was an idea that had enormous potential for Connecticut residents, who could save upwards of a billion dollars a year in federal income and payroll taxes.”
State Sen. Paul Honig, D-Harwinton, led a roundtable discussion last week on his proposed plan. He introduced the idea during the past legislative session, and the Finance, Revenue and Bonding Committee raised it as Senate Bill 513. The bill had bipartisan support, passing the committee on a 40-14 vote, but did not get called to the Senate floor.
Honig explained the idea using an example of a worker earning $100,000 a year and paying $5,000 in state income tax. The worker takes a pay cut to $95,000, but no longer pays Connecticut state income tax on their wages. The employer pays a $5,000 payroll tax. The employee still nets $95,000 and the state still gets $5,000 in income tax. But the employee now reports $95,000 on their federal income tax instead of $100,000. The change would result in an estimated tax savings of about $1,100, Honig estimated.
The next step is to survey working group members on solutions to issues that were raised, such as mitigating lower Social Security benefits, whether the program should be voluntary or mandatory, and whether the program applies to special classes of employers, Honig said.
The working group includes legislators and representatives from legal, financial and business-advocacy groups.
Honig acknowledged the potential for legal challenges, which is why the working group includes legal experts, he said. Should the idea spread to other states, the federal government could potentially respond by raising taxes to compensate for the lost revenue, he said.
But even if that happened, Connecticut residents would still pay proportionally less because residents in the nine states without a state income tax – Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming – still pay federal income tax. But their states would not be able to offer the same payroll tax adjustment that Honig is proposing Connecticut adopt.
“The idea here is to try to save people money on their taxes, but in this case, it’s their federal taxes,” Honig said. “And I think in the environment we’re in, where cost of living is such a big issue for so many people, I think it’s the right thing to do to try to find ways, you know, creative ways to try to save people money.”