Connecticut’s small business climate ranks eighth worst in the country according to a new national study.

The Small Business & Entrepreneurship Council ranked Connecticut 43rd in its annual Small Business Policy Index, one spot better than in 2016.

SBE 2017 Small Business Policy IndexNevada ranked first in the index, followed by Texas, South Dakota, Wyoming, and Florida.

California had the worst policy climate in the nation for small businesses.

At 33rd, New Hampshire was best among the New England states, followed by Massachusetts (37), Rhode Island (40), Connecticut, Maine (44), and Vermont (46).

High taxes and fees and government red tape, which the SBE said “disproportionately impact small businesses and make it more difficult to grow, compete, or survive,” were key elements in the rankings.

The SBE index measures 55 factors covering taxes, rules and regulations (including workplace mandates), population growth, and state government spending and debt.

Income Taxes

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

Connecticut ranks 39th for personal income tax rates and 43rd for combined state and local property tax burden. Lawmakers approved the largest tax increase in the state’s history in 2011 and the second largest four years later.

“Greater governmental burdens—via taxes, regulations, spending, debt—create greater negatives for economic risk-taking, growth in the economy, and the state’s competitiveness and attractiveness,” the report said.

“A high personal income tax rate raises the costs of working, saving, investing, and risk-taking. Personal income tax rates vary among states, therefore affecting relative costs and crucial economic decisions and activities.”

SBE also noted the relationship between GDP growth and average tax rates, saying that “higher state taxes are generally associated with lower economic performance.”

Economic Growth

The economies in the top 25 states in the SBE index grew an average 1.87% between 2010–2015, more than a third faster than the bottom 25 states.

Connecticut’s economy hit a post-recession peak of 1.2% in 2014 before posting a modest 0.6% increase the following year.

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

Lawmakers can't ignore the issues that discourage investment, risk-taking, job creation, and economic growth.
The index ranked the state 45th for five-year spending trends and 48th for per capita state and local government debt.

Those fixed costs are driving much of Connecticut’s projected $3.6 billion budget deficit over the next two years.

“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.

“As debt levels rise, the threat of future tax increases rises as well.”

Good Building Blocks

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.

The General Assembly would be wise to leverage Connecticut’s stronger rankings as it works to improve our small business climate.

CNBC’s 2016 America’s Top States for Business rankings put Connecticut in the top 20 for our workforce productivity, education system, and technology and innovation.

By any measure, those are good building blocks.