Hold Onto Your Wallet: Going Retro Isn't A Fashion Statement - It's A Financial Fact of Life

Grab those calculators – the state will soon begin taking an extra large bite out of taxpayers’ paychecks.

When the General Assembly , they passed the highest tax increases in Connecticut’s history. And the personal income tax hike is retroactive—most taxpayers now owe seven months of back taxes.

Starting Aug. 1, taxes will be withheld at new higher rates. The state will also collect the back-taxes due from Jan. 1 through July 31. In other words, for the first five months of the new rates—from August through December—wages will be withheld at more than twice the amount.

"Last weekend I was at a neighborhood barbecue and people came up to me asking 'Really? Retroactive? You had to make it retroactive?' " said state Rep. Kim Fawcett, a Democrat representing Fairfield and Westport in the 133rd House District. "That’s not just government putting the knife in, but turning it."

Once on the books, a tax hike tends to stick, said state Rep. Gail Lavielle, a Republican representing Wilton and Norwalk in the 143rd House District.

“People are going to be in shock,” Lavielle said. “I’ve gotten a slew of emails, everyday, from people who are concerned.”

Constituents also worry about the confluence of the income tax hike with newly enacted sales taxes and reduced property credits. For example clothing and footwear that retails for $50 and less are now taxed.  And the maximum property tax credit was reduced from $500 to $300.

People may very well postpone major and minor purchases, Lavielle said.

Indeed some area retail stores are already seeing signs of acquisition aversion.

"People are very surprised. The T-shirts, the socks – those are things that were never taxed before are now. And they’re disappointed," said Robert Mallozzi, owner of in New Canaan. "It’s [the state] kind of nickel and diming."

Over at in Westport, notices alerting customers to new taxes plaster the wall. 

According to the Connecticut Business & Industry Association, the catch-up provision of the income tax increase shock most residents. And the reduced spending power of state consumers combined with lower income for business people paying personal income taxes could hurt Connecticut's economy.

“I’m hearing from many small businesses whose owners don’t know what to do because they haven’t heard from Department of Revenue services,” said state Rep. Brenda Kupchik, a Republican representing Fairfield in the 132nd House District.

Until Aug. 1, three tax brackets divided the state; 3 percent, 5 percent and 6.5 percent. The new legislation added a 5.5 percent and a 6.7 percent bracket.

The three percent bracket will be eradicated for certain income levels. Instead it will be replaced with a five percent bracket. Included in this are those earning more than $100,500 and filing jointly, those filing singly and earning $56,500, those filing as head of household and earning $78,500, and those earning $50,250 married filing separately.

Also those filing joint returns of $700,000 or more will now pay 6.7 percent on all income. Before the budget passed they would have paid 3 percent on the first $20,000, and 5 percent on the next $680,000.

That the estate tax is also retroactive simply adds to the tax hike kerfuffle.

"That’s particularly despicable," said state Rep. John Frey, a Republican representing Ridgefield in the 111th House District. "For someone who died earlier this year, and all their affairs taken care of – now family told they owe even more money."

The tax hike also includes a ‘recapture’ of benefits of lower brackets, according to the Office of Policy Management. For those earning between $400,000 and $700,000 the recapture works to eliminate $150 of lower bracket benefits for every $10,000. That means joint filers will pay an extra $4,500. Joint filers earning $700,000 or more will pay an extra $12,300.

For some organizations the tax increases have a silver lining.

According to a May 2011 Connecticut Voices for Children report, Joachim Hero and Shelley Geballe said the changes will “start to rebalance Connecticut’s currently regressive system of state and local taxes by reducing taxes on many of Connecticut’s lower-income residents (through the EITC) while modestly increasing taxes at higher incomes. Connecticut ranks among the top ten highest tax states in the country in the share of income paid in state and local tax by its poorest 20 percent, though its wealthiest 1 percent pay a smaller share of their incomes in state and local taxes than in most other states.”

Of course the new tax hike means more paperwork. The state’s Department of Revenue Service published a new 8-page tax table and 4 pages of revised withholding rules for employers.

But then starting January 2012 taxpayers will need to re-do their withholding rules to subtract the retroactive calculations.

“This combined with all the sales taxes gets into one big ‘uh-oh.' A retroactive tax hike is questionable policy at best,” said state Sen. John Shaban, a Republican representing Easton, Redding, and Weston in the 135th House District. “It's the fairness of it. It doesn’t give you a chance to plan your life.”