According to an often-cited tax study, Connecticut’s corporate tax burden supposedly is among the nation’s lightest. But is it?
No, says the author of the study.
Andrew Phillips, who wrote Total State and Local Business Taxes, Ernst & Young (Aug. 2014), cautions that the results “should not be interpreted to mean that Connecticut is a low-tax environment.”
He acknowledged that the study’s results showing the ratio of business taxes to gross state product have been interpreted as indicating below-average taxes in Connecticut.
“However,” said Phillips, “this particular result is not a product of low taxes in Connecticut, but rather is due to the state’s high level of productivity, which is 25% higher than the U.S. average on a per-employee basis.”
A more accurate measure of Connecticut’s actual corporate tax burden, he said, is per employee, instead of per dollar, of economic activity. In the per-employee measure, Connecticut ranks 27th in the U.S.
And that was before the legislature passed more than $1.5 billion in new taxes, much of it on businesses.
When you consider both household and business taxes, said Phillips, “Connecticut’s overall state and local tax collections are 57 percent higher than the national average, on a per capita basis, and 15 percent higher when measured per dollar of personal income.”
Phillips went on to mention that Connecticut’s marginal tax rates—a factor with “a more significant effect on economic growth than the dollar amount of state and local business taxes or the average tax rate”—are 10% higher than the US average.
And that has a big impact on new investments on such “highly mobile” manufacturing, headquarters businesses, and business services facilities, said Phillips.
In Connecticut, that’s meant private-sector employment growth over the past decade of 1.2%, far less than the U.S. average of 6.5%.
Four years ago, Ernst & Young published a study on the competitiveness of each state’s tax policy, weighing several factors that impact the location decisions of businesses.
Connecticut’s business tax environment ranked 32nd in the U.S. for taxes on new investment, weighted by jobs, said the competitiveness study.
“As potential increases in Connecticut’s business taxes are debated,” said Phillips, “it is important to keep in mind that the level of tax burden can be measured in several ways and that on several important dimensions, including the marginal tax rate on new business investment, Connecticut imposes higher-than-average state and local tax burdens.”