Study says state business tax climate is relatively rosy

A new study shows Connecticut businesses faced one of the lowest tax burdens in the nation in mid-2011, eclipsed by just two other states, when those taxes are compared with their productivity.

But the study, commissioned by a coalition of nearly 600 multi-state corporations, also reviewed finances just before Connecticut and many other states raised taxes on businesses to overcome huge operating deficits.

The $7.4 billion burden imposed by state and local governments on Connecticut businesses in the 2010-11 fiscal year represented just 3.6 percent of companies’ gross state product, or the annual value of the businesses’ economic output, according to the study prepared for the Council on State Taxation by the global accounting firm Ernst & Young.

Only North Dakota and Oregon finished lower, at 3.5 percent, while Utah also recorded a 3.6 percent effective tax burden. The national average, according to the study, was 5 percent.

Connecticut outperformed most of its neighbors by wide margins. Massachusetts came closest with a state and local tax burden equal to 3.8 percent of businesses’ productivity. Other neighboring tax burdens included 5.1 percent in New Jersey, 5.6 percent in Rhode Island and 6.2 percent in New York.

State Sen. Gary D. LeBeau, D-East Hartford, co-chairman of the legislature’s Commerce Committee, said the study casts some needed perspective on a tax system subjected to “overblown” criticism.

“I think we’re right in the middle,” LeBeau said, conceding that Connecticut businesses do face some tough economic challenges, but not all of them stem from taxes. “We still have one of the worst property tax burdens in the country, but we’re not a high-tax state. We’re a high-cost state.”

The distinction, LeBeau said, is important, even though many companies lump the blame for all of their costs — both taxes and other expenses — on government.

Connecticut Business & Industry Association Senior Vice President Joseph F. Brennan challenged the study’s approach of weighing taxes against productivity, arguing it offers an incomplete picture.

“We’re never going to be a low-cost state,” he said, adding that if taxes are being compared with business productivity, the study also should account for high energy and labor costs and overall higher cost of living Connecticut businesses face.

“There’s always some good and some bad” when comparing state tax networks, Brennan said, adding that “we do have some good things in our tax code.” Connecticut is very competitive nationally in terms of the tax credits it offers to encourage research and development and capital expansion, he said.

“The study by the Council on State Taxation is interesting, but taxes are just one aspect of doing business in a state,” said Gian-Carl Casa, spokesman for the state Office of Policy and Management, Gov. Dannel P. Malloy’s chief budget and policy development agency. “It does show that Connecticut has a very low ratio of business-taxes-to-gross-state-product, one of the best in the nation, but even that measurement does not give a full picture of the dynamic place Connecticut has become under Gov. Malloy.”

Casa noted that the U.S. Department of Commerce’s Bureau of Economic Analysis ranked Connecticut as having the ninth-fastest growing economy of all 50 states in 2011, and second-fastest growing on the Eastern Seaboard. The state has regained 22,000 jobs since January 2011, he added.

Still, one critic argued Monday that Connecticut appears to have headed in the wrong direction over the past two years.

“There is a place in this world for studies and analyses, but there is a bigger place for observations of what is transpiring in real life,” said state Sen. Andrew Roraback of Goshen, the ranking Republican senator on the tax-writing Finance Committee.

Connecticut ranked 13th overall in terms of business tax growth in 2010-11. Taxes in the Nutmeg State rose 6.3 percent in that fiscal year. The 2009 state legislature and Gov. M. Jodi Rell had ordered a 10 percent surcharge on corporation taxes for the 2009 through 2011 calendar years.

Malloy, who inherited a built-in deficit projected as high as $3.67 billion for 2011-12, worked with the legislature to approve several business tax hikes in 2011, including:

• A larger, 20 percent surcharge on corporation taxes for the 2012 and 2013 calendar years.
• Boosting the base sales tax rate from 6 percent to 6.35 percent, eliminating exemptions on clothing and several other goods and services, and adding even higher rates on expensive cars, jewelry and other luxury items.
• A $40 million increase in the unemployment compensation tax.
• And a temporary tax through 2013 on electricity generation.

Roraback, who also is a candidate for Congress in the 5th District, said the message he receives from businesses on the campaign trail is clear, and far from positive.

“The business climate here is inhospitable and not conducive to job creation,” he said. Connecticut has regained less than one-third of the 120,000 jobs it lost in the last recession, and Roraback said that track record isn’t due solely to economic forces at the national and international levels. “They’re also linked to Connecticut’s specific environment,” he said.

But LeBeau responded that under Malloy, Connecticut also has taken steps to bolster its business climate since 2011.

The 2011-12 deficit was closed without touching a crucial property tax exemption for manufacturing machinery.

And a special legislative session on job growth last October authorized:

• Doubling the scope of the Malloy’s First Five Program, which provides tax credits, low-interest loans and other incentives to as many as 10 companies committing to create at least 200 jobs.
• $125 million to assist new start-up companies working with Connecticut Innovations Inc.
• $100 million for the Small Business Express Program, which would provide job creation grants and loans specifically to smaller companies.
• $20 million for the Step Up program, which encourages businesses to add employees in new areas by subsidizing the cost of those posts for up to six months.
• And nearly $20 million to establish or expand manufacturing programs at four state community colleges.

“Under Gov. Malloy’s leadership Connecticut is on the move economically and becoming a more attractive place to do business, whether it’s by attracting Jackson Labs, Alexion, Sustainable Building Systems or helping the many businesses through the Small Business Express program,” Casa said.

“Business leaders have taken a look at the new Connecticut and found it a great place to be,” he said.