Payroll Tax in Response to Federal Tax Changes

In December 2017, the U.S. Congress passed the Tax Cuts and Jobs Act (TCJA), which made significant modifications to the federal tax code, including implementing a $10,000 limit on a widely utilized personal income tax deduction for state and local taxes (SALT) paid. Prior to the enactment of this cap, taxpayers who itemized their deductions could reduce their federal tax liability by the full value of their paid state and local taxes. This federal tax change is expected to negatively impact taxpayers in Connecticut, which is one of several states with a significant percentage of residents who itemize deductions, allowing them to reduce their tax liability accordingly.

This policy briefing introduces and examines how the State of Connecticut can replace a portion of the state income tax with a payroll tax on all W-2 wages to mitigate the negative impacts of federal tax changes on Connecticut taxpayers, and potentially yield more state revenue while reducing the federal tax liabilities of Connecticut residents.