Connecticut's Personal Income Tax: Determination of Tax Liability in 1991 and Thereafter

• Pages: 345
• Publication year: 2021

Connecticut Bar Journal Volume 65.

65 CBJ 345. CONNECTICUT'S PERSONAL INCOME TAX: DETERMINATION OF TAX LIABILITY IN 1991 AND THEREAFTER

CONNECTICUT'S PERSONAL INCOME TAX: DETERMINATION OF TAX LIABILITY IN 1991 AND THEREAFTER

BY MARK H. NEIKRIE*

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income taxes of $175.50, an increase of $108.(fn85) This is commonly referred to by accountants and other tax practitioners as "the cliff effect".(fn86)

At certain income levels, because of the cliffs, the rate of tax on an extra $1 of income is not 4.5%, but will range anywhere from 3,829% to 43,205%.(fn87) However, the effective rate of tax will never exceed 4.5%.(fn88)

In the above example, the additional $108 of tax on the extra dollar of Connecticut A.G.I. is attributable to the tax credit being reduced from 75% on $30,000 to 35% on $30,001.(fn89) Although technically the income tax has a flat rate,(fn90) because of the exemptions and tax credits, and the phase out of each, the end result is an income tax that is graduated.(fn91)

The problem with a tax rate structure that contains large increases abruptly, as the Connecticut income tax does, is that it discourages economic activity and violates the principles of "horizontal equity",(fn92) which may cause voluntary compliance by taxpayers to fall.(fn93) Since the cliffs occur where the tax credit is reduced or the exemptions are phased out,(fn94) it may be possible for some taxpayers to plan so that their income for the year does not increase to a level Where an exemption or tax creditwill be reduced or eliminated.(fn95) Furthermore, since "the cliffs that accompany the reductions in the tax credit are more dramatic than those connected with the phase out of the exemptions",(fn96) taxpayers will want to avoid those income levels that just exceed the limits of a tax credit,whenever possible.

XI. CONCLUSION

This article is not an exhaustive analysis of the Connecticut tax on personal income. The tax is much too new to anticipate how the myriad transactions that will occur will be treated under the tax. Furthermore, the D.R.S. is not prepared to state its position on how a number of events and transactions will be taxed. Thus, the best that can be done is await guidance from the D.R.S. and the courts.

While we wait, the winds of tax repeal blow. It is impossible to predict with any certainty how long Connecticut will continue to tax personal income. When calm returns, if the tax repeal storm has...