Document Type



Taxation-State and Local | Tax Law


This Report analyzes a 5% payroll tax that would be imposed on employers in the amount of the Connecticut wages they pay to their employees. An anticipated response to this tax is that employers would shift this tax to their employees by reducing their wages by the cost of the tax. In this case, there would also be a reduction of the existing personal income tax rates by 5 points, but only if there were a reduction in wages. The effect would be to eliminate the 3% and 5% brackets, and would only be applicable to wages; it would not apply to income from dividends, capital gains, interest, rents, royalties, and the like. This “tie-in,” that is, the reduction in tax rates only if wages are reduced, should be required or else there would be little incentive for employees to support a wage reduction. Tie-ins, such as this, have many complexities and are examined in the Report.

The goal of the proposal is that workers would have more take-home pay, despite their wages being reduced. This results from a reduction in their taxable income and a reduction in their FICA taxes. Employers would also save in reduced FICA taxes. Consequently, a payroll tax would increase an employee’s take home pay at the expense of the federal fisc, which is part of its State charm. Somewhat counter-intuitively, even though wages are reduced, the combination of State income tax savings and the federal income and FICA tax savings means the employee is actually better off and will end up with more take-home pay.

In the event that wages cannot be reduced, the payroll tax becomes an explicit tax on employers. Because wages would not be reduced, employers would not receive any decrease in the amount of FICA taxes they pay and the payroll tax would essentially be a 5% increase in the cost of doing business.

In determining the outcomes of a proposed payroll tax, a critical threshold question is whether employers will be able to shift the payroll tax to employees by reducing their wages. If they cannot, there is no reason to adopt a payroll tax. However, this question could be avoided if the tax were elective by employers. Presumably they would not make the election if they thought they could not reduce wages.

Because there are so many moving and interdependent parts, the lack of a fully drafted bill limits what can be said in this Report with any certainty. Nonetheless, the Report identifies many of the issues needing to be addressed, such as what groups could benefit from the tax, how the tax could be imposed on the federal government and tribal nations, and the tax’s impact on insurance companies.

The Report suggests that the State reach out to New York to evaluate their experience, which has adopted a similar tax through a credit mechanism, which is a simpler approach than the one Connecticut is considering.