Paychecks take a double hit from income tax hike starting Aug. 1

Many Connecticut wage earners will notice their paychecks shrinking faster than anticipated starting this August, when the Department of Revenue Services begins implementing the new $875 million state income tax increase.

That’s because the tax hike, which adds three new tax rates, reduces a property tax credit and adds an earned income credit for poor families, is retroactive to Jan. 1, but won’t be drawn from paychecks until August.

That means the state’s tax agency, which released new withholding tables this week, has five months to collect 12 months’ worth of tax obligations. For the 22 weeks between Aug. 1 and Dec. 31, the additional withholding will be about 2.4 times the increase that will be applied starting in January 2012.

withholding chart

“Legislative changes to the income tax for the current year were more complex than usual,” DRS Commissioner Kevin B. Sullivan said. “Therefore I am very pleased that we turned around the new interim withholding tables in a couple of weeks so employers have plenty of lead time to get ready.”

Until this year, Connecticut taxed most income at 5 percent, though rates of 3 percent on the lowest wages and 6.5 percent on top earnings also were on the books. In addition, the state offers a personal exemption and credit to further reduce taxes on the poorest households.

The tax legislation enacted earlier this month makes a number of changes, including creation of an earned income tax credit for the poorest working families and a reduction in the maximum property tax credit from $500 to $300. But the key to the withholding changes for most taxpayers is the addition of three new income tax rates, including a new top rate of 6.7 percent.

Though the new fiscal year starts July 1, Malloy and lawmaker reached back to the start of the calendar year to impose those new rates. Whatever increased tax burden falls on a worker in 2011 will be withheld from paychecks between Aug. 1 and Dec. 31.

“I expect it will be shock to some,” Rep. Patricia Widlitz, D-Guilford, co-chairwoman of the Finance, Revenue and Bonding Committee, said Thursday. “But I don’t know how else we could do it. It’s never s good thing to have your taxes raised, but we tried very hard not to overburden any one group, especially those who can least afford it.”

House Minority Leader Lawrence F. Cafero, R-Norwalk, who charges that Malloy and his fellow Democrats in the legislative majority raised taxes too high given the unprecedented $1 billion surplus built into the newly adopted, two-year budget, predicted that so-called “catch-up” period for tax collections particularly will harm the businesses Malloy pledged to protect.

“In these economic times we’re going to be banging them more than twice the rate (to collect) a year’s worth of increases,” Cafero said, noting that many small business owners report their business profits through the income tax, rather than the corporation levy. “Despite what Governor Malloy has said, Connecticut is still not open for business. Actions speak louder than words.”

But Roy Occhiogrosso, Malloy’s senior adviser, said “the reason that the business community is supporting the governor’s budget is because he’s done more to stabilize the state’s finances than the last two Republican governors have done in 15 years.”

Occhiogrosso noted that Malloy announced this week a plan to invest nearly $900 million in public and private funds to expand the University of Connecticut Health Center. The administration projects this would create about 3,000 construction jobs per year through 2018.

“When the governor says the state is open for business,” Occhiogrosso added, “he is 100 percent right.”