Connecticut’s plan to beat the system is clever—too clever, really. Jared Walczak of the Tax Foundation explained the details in a recent article: “the state’s graduated-rate income tax would be largely replaced by a 5 percent payroll tax, plus an additional 2 percent tax on income above $200,000, which would raise more money than the current income tax. The state’s Earned Income Tax Credit (EITC) would be increased to offset the higher tax liability for low-income earners, and because the payroll tax is a deductible expense for businesses, taxpayers subject to the $10,000 [SALT] deduction cap would get a federal tax cut even as the state generates more money.”
Walczak’s article points out the main problems with the complicated proposed tax structure. Getting the thing to work at all without creating bizarre incentives is a problem. For example, a payroll tax with multiple brackets will inevitably require massive end-of-year adjustments for anyone working multiple jobs. It also results in a different tax structure for wage workers and independent contractors, as well as people who live off investments.