With new tax rates, smaller paychecks on the way for many Connecticut workers

Many workers in Connecticut need to brace for a one-two punch to their paychecks this August, when the state begins collecting not only more income taxes but applies the increases retroactively to Jan. 1.

The higher rates, impacting single filers earning adjusted gross incomes over $50,000 and married joint filers earning more than $100,100, are part of the tax package Democratic lawmakers are relying on to help close a $3 billion-plus budget deficit.

Also, a host of new sales taxes takes effect July 1, and the overall rate is lifted from 6 percent to 6.35 percent.

The state Department of Revenue Services has issued a new eight-page set of tax tables and four pages of revised withholding rules for employers to apply to their pay rolls this summer. The tables reflect not only the new rates but also, according to DRS spokesman Sarah Kaufman, the fact that, because they are retroactive, affected workers owe seven months worth of back taxes.

"Employers are supposed to go ahead and, as of Aug. 1, withhold at higher rates with the added catch-up ... to make sure people have not under-withheld when filing taxes in the coming year," Kaufman said.

She said employees who want to get a head start and spread out the hit could request having additional taxes taken out of their checks now.

"And when the new rates start being deducted in August, they can change their withholding amount again so it's a little bit less," Kaufman said, adding: "It can be fairly complicated."

Then there are the self-employed who file quarterly estimated income tax payments based on assumptions about their annual earnings.

"They need to go back to what they've already paid, apply the new rates to see what they should have paid, and then they need to take that additional amount and put that into their next payment," Kaufman said.

The Connecticut Business and Industry Association and the state branch of the National Federation of Independent Business are working hard to explain it all to their respective members.

"We're still trying to get the word out to everybody this is a retroactive tax," said CBIA's Bonnie Stewart.

Stewart said the organization is emphasizing the need for employers to communicate with employees that their take-home pay will soon be decreasing. She said some members have fretted that workers have not kept up with the news about the state budget and will be taken by surprise.

Andrew Markowski, state director for NFIB, said the looming tax increases mean small businesses must begin reassessing their plans for the remainder of the year and beyond.

"It's less money moving forward, but also less money retroactive, and I can guarantee most businesses did not anticipate that," he said. "And small businesses are operating on such a thin margin they certainly didn't have that money left over in an account somewhere ... So there's a recalculation of everything."

Markowski noted that while large companies have staff or outside contractors to sift through the fine print, sometimes small companies do not have that benefit. And just figuring out the changes could eat into their productivity.

"The fact DRS put out a four-page document of rules just shows the type of burden this is going to be," he said.

Then, come January, everyone will have to go through the process all over again because DRS will revise the withholding tables, subtracting the retroactive calculations for the first half of 2011.

University of Connecticut professor Steven Lanza, executive editor of The Connecticut Economy quarterly magazine, said the higher income tax rates coupled with retroactive payments plus a slew of sales tax hikes in effect July 1 could prove a "stiff blow for taxpayers to absorb in a short period of time."

"If we're reaching back to Jan. 1 and making up all this lost ground, that's going to be far more noticeable," Lanza said. "Much of the extra burden of the tax is on high-income earners and these are folks that have a really relatively low marginal propensity to consume ... But for folks in the middle income brackets, this could at least create a psychological jolt where they're saying, `Gee, I've got to start making some (spending) decisions here.' "

A true analysis of the impact the increases have on Connecticut's economy will not be available for several years, Lanza said.

"There's so much other stuff going on at the same time with the economy," he said. "If you've just got a month or two of data or a year or two of data, that's not enough."

Staff Writer Brian Lockhart can be reached at brian.lockhart@scni.com