Report: High Taxes, Mandates Hurt State’s Small Business Climate

Connecticut’s small business climate ranks seventh worst in the country according to a new national study released this week.

The Small Business & Entrepreneurship Council ranked Connecticut 44th in its annual Small Business Policy Index, one spot worse than in 2018.

The index ranks the 50 states according to 62 different policy measures, including taxes, regulatory burdens, state spending, and government debt.

High taxes and fees and government red tape, which the council’s report said “drain enterprises of vital resources, distort decision-making and incentives, and redirect energies,” were key elements in the rankings.

Connecticut fared poorly across a number of those metrics, with bottom 10 rankings for per capita government debt, state and local spending, energy costs, workers’ compensation premium costs, state and local tax rates, and business taxes.

“Most small business owners have firsthand knowledge of the costs and burdens imposed by government,” the SBE Council report said.

“Unfortunately, too many elected officials, policy advisers, and special-interests ignore the economic realities of how government affects entrepreneurship, business, and investment.”

Tax Rates

Connecticut’s 346,950 small businesses are vital to the state’s economy, representing over 99% of all businesses and employing over 750,000 people—49% of the private sector workforce.

The state ranks 40th for personal income tax rates and 43rd for combined state and local property tax burden.

Personal income tax rates greatly affect small businesses because 94% file taxes as individuals (sole proprietorship, partnerships, S-Corps.) rather than corporate income taxes.

Lawmakers approved two of the largest tax increases in the state’s history over the last nine years, with the legislature currently considering $2.34 billion in tax and fee hikes for fiscal 2020 and 2021.

Economic growth and population growth are significantly faster in the top half of the states ranked on the index compared to the bottom half.

In addition, legislators are pushing a number of new workplace mandates that will disproportionately hurt small businesses, including paid family and medical leave and increasing the state’s hourly minimum wage.

“Some elected officials, policymakers and special interests believe that taxes, regulations, and other governmental costs can be increased with impunity,” the report said.

“That is a political fantasy. Economic reality tells us something very different. Ever-mounting burdens placed on entrepreneurs and small businesses by government negatively affect economic opportunity.”

Economic Reality

The report illustrates the consequences of state policies, noting that “economic growth and population growth are significantly faster in the top half of the states ranked on the index compared to the bottom half.”

For instance, Connecticut’s economy expanded last year for just the second time in 11 years, growing a modest 1%, seventh slowest in the country.

Washington state, ranked 10th on the SBE index, led all states in GDP growth last year, with its economy expanding 5.7%

“Public policy impacts opportunity and quality of life for all, as exhibited by movement of people among the states, with the states ranking in the bottom half on the index losing significant population to the states ranked in the top half,” said council president and CEO Karen Kerrigan.

The #CTeconomy grew 1% last year, seventh slowest in the country. Coupled with sluggish job growth, the GDP numbers clearly illustrate the growing economic gap between Connecticut, the region, and most of the U.S. ⌛️🎢 https://t.co/TSMK0U7eXM

— CBIA (@CBIANews) May 1, 2019

“Many governors are advancing innovative and bold reforms to attract investment and entrepreneurs, while others continue down the self-destructive path of ever-increasing government burdens.

“The latter group ends up repelling business opportunity and encouraging their current entrepreneurs to search elsewhere for low-cost, business-friendly environments.”

Connecticut’s debt, particularly its growing unfunded liabilities, also contributed to its poor performance in the latest SBE index.

The index ranked the state 44th for five-year government spending trends, 47th for unfunded pension liabilities, and 48th for per capita state and local government debt.

Those fixed costs are driving much of Connecticut’s long-term fiscal instability, including a projected $3.5 billion, two-year budget deficit.

Best, Worse States

Texas ranked first in this year’s index, followed by Nevada, Florida, South Dakota, and Wyoming.

New Jersey had the worst policy climate in the nation for small businesses, with California, Hawaii, New York, and Minnesota rounding out the bottom five.

At 27th, New Hampshire was best among the New England states, followed by Massachusetts (38), Rhode Island (39), Maine (41), Connecticut, and Vermont (45).

“Since taxes imposed on entrepreneurs, businesses, and consumers reflect the level of government spending, future spending and taxes are related to levels of government debt,” the report said.

Small businesses drive Connecticut’s economy, and lawmakers cannot ignore the issues that damage competitiveness and discourage investment, risk-taking, job creation, and economic growth.