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Is Our State A Tax Haven?

Study That Says Yes Gets Strong, Mixed Reactions

By MARA LEE and MATTHEW STURDEVANT

August 04, 2011

Connecticut businesses have the lightest tax burden in the nation, according to a new study that is being hailed by some as proof that companies are overly coddled by the state, and slammed by others as misleading and dangerous.

The study done by Ernst & Young for the Council on State Taxation (COST) adds up the total amount of state and local taxes paid by business in each state - which was $6.9 billion in Connecticut in 2010. Each state's total is then divided by that state's total private-sector economic output, for a percentage.

At 3.3 percent, Connecticut is far below the national average of 5 percent.

The study shows that economic development that relies on tax breaks for big businesses is misguided, said Wade Gibson, senior policy fellow at Connecticut Voices for Children, a left-leaning advocacy group based in New Haven. The group suggested that legislators focus on costs other than taxes as they try to help companies create jobs.

That thinking is dead wrong, the state's most prominent business lobbying group and its Republican allies said Wednesday. On the contrary, the study's findings offer no silver lining at all in the storm clouds of Connecticut's business climate, which they say is abysmal. The Connecticut Business and Industry Association says its members are concerned about state tax increases passed in May, and "they're really concerned about future tax increases."

What matters, said Peter Gioia, the CBIA vice president for research, is how competitive each state is. "It's really dangerous to draw inferences in terms of relative competitiveness" from the COST study, he said.

The report itself agreed with that point. Although the measure comparing how much money is collected through 10 kinds of taxes that can fall on businesses provides "a starting point for comparing burdens across states, they do not provide sufficient information to evaluate a state's competitiveness," the study said.

For instance, Texas' business tax burden is about 50 percent higher than Connecticut's, according to the report. But in an earlier COST study, Texas ranked 19th in state and local business tax competitiveness, and Connecticut ranked 32nd. That study aimed to compare relative tax liabilities on capital investments, using a database of recent investments, such as a new General Electric engine factory in Alabama.

The study attempted to measure business costs for property taxes, corporate income tax, individual income tax on business owners, unemployment insurance, excise taxes, sales and use taxes, taxes on insurance premiums, taxes on public utilities, license taxes, and taxes on natural resource extraction. What it doesn't show is how much of each tax is paid by different types and sizes of businesses.

And this and other studies do not capture the two largest costs for most businesses - labor and health care premiums - which vary widely throughout the country. Connecticut's high wages are a big reason the state's relative tax burden looks so low, because high incomes make the overall economy larger.

Those wages are a good thing, said Gibson, at Voices for Children. "That means your citizens get paid well, and it's a nice place to live," he said. "Rather than trying to engage in this race to the bottom to try to compete with Texas for the lowest costs ... they have massive poverty and deprivation in Texas. Yeah, maybe if we were poorer than Texas we could compete with them well for jobs, but is that really what we want for the state, or do we want to figure out a way to be worth the price that we charge?"

State Sen. Andrew Roraback, R-Goshen, the ranking GOP member of the legislature's tax-writing committee, said that looking at the tax burden does not take into account legislative mandates, such as health insurance coverage mandates and paid sick leave for workers in service industries. It also doesn't look at electricity costs, which are higher in Connecticut than anywhere else in the lower 48 states.

"I'm in no position to refute the mathematical formula, but I think it would be foolhardy to conclude that this statistic indicates that Connecticut is an easy place to do business, or an attractive place to do business," he said.

"I don't think people are going to read this and say, 'Oh my gosh, we didn't know. This is a great state to be in,' " Roraback said. "People's experiences every day, the bills they get, their ability to profit, is also measurable and I think Connecticut business owners are astute enough to recognize those things that make Connecticut attractive, as well as those things that make it a challenging place to do business."

The lowest and highest states for business tax burden, based on total local and state taxes paid by business, as a percent of the total size of each state's economy.

LOWEST:

Connecticut 3.3%

Delaware 3.7%

Maryalnd 3.7%

North Carolina 3.7%

Oregon 3.8%

HIGHEST:

Maine 6.8%

Vermont 7.1%

Wyoming 8.1%

North Dakota 8.6%

Alaska 13.3%

SOURCE: Council on State Taxation