Connecticut's small business tax burden is ranked 10th worst in the country according to a new report released this week.
The state's ranking in the Small Business & Entrepreneurship Council's Small Business Tax Index 2016: Best to Worst State Tax Systems for Entrepreneurship and Small Business was unchanged from last year.
And it's the fourth year in a row the index ranked Connecticut in the bottom 10 states.
The SBE index creates a single score for each state based on 25 different tax measures, including:
- Personal income tax (Connecticut rank: 39)
- Capital gains tax (41)
- Dividends and interest tax (38)
- Corporate income tax (45)
- Corporate capital gains tax (46)
- Property taxes as a share of personal income (44)
- State and local sales, gross receipts, and excise taxes as a share of personal income (17)
- Gas tax (45)
- Diesel tax (49)
New York, Maine Improve
Eleven states improved their tax climates since last year, including New York, which reduced corporate income and capital gains rates (and will begin cutting individual income tax rates in 2018).
Maine was the only New England state to improve its ranking, cutting individual income, capital gains, and dividend taxes.
The top five state tax systems for small business were South Dakota, Nevada, Texas, Wyoming, and Washington.
California ranked worst, followed by New Jersey, Minnesota, Iowa, and Hawaii.
Substantial tax reforms will help poor-ranking states make huge leaps in their competitive standing.
While legislators avoided further tax increases this year as they dealt with the state's ongoing fiscal crisis, billion dollar-plus deficits await them after this fall's General Assembly elections.
Income Tax Impact
Hikes in the personal income tax hit small businesses particularly hard, with an estimated 94% filing returns as individuals (e.g., sole proprietorships, partnerships, and S-Corps).
As the SBE report noted, income taxes affect individual economic decision-making in important ways, with high taxes raising the cost of working, saving, investing, and risk-taking.
According to the report, "when it comes to state and local taxes—as well as levies at the federal level—the direction that policy should be pointed in is clear. Keep the overall tax burden low."
Low tax burdens drive economic risk-taking, promoting entrepreneurship, investment, economic and income growth, and job creation.
"If a state ranks poorly on the Small Business Tax Index, then tiny changes will make little difference," the SBE said.
"While small steps are better than doing nothing and can stoke momentum for additional reform, substantial reforms and reductions will help poor-ranking states make huge leaps in their competitive standing."