Are business taxes that high given what Connecticut companies can earn?

Connecticut’s business taxes don’t loom quite so large when compared with the revenues companies rake in throughout the Nutmeg State.

A recent study commissioned by a national coalition of nearly 600 multi-state corporations found Connecticut continues to offer one of the most favorable business tax climates in the country – even after the hefty tax hike ordered two years ago to close a major state budget deficit.

But a veteran Republican on the state legislature’s tax-writing panel said the study is flawed, failing to take into account high business costs besides taxes that eat the potential profits of Connecticut’s companies.

The analysis prepared for the Council On State Taxation by the global accounting firm of Ernst & Young placed Connecticut in a four-way tie for the second-most-favorable state and local business tax burden when compared with its gross state product -– the cumulative value of its business productivity.

The study also found Connecticut’s business tax burden represents just three-quarters of the national average and is just one tenth more than North Carolina’s, which ranks as the nation’s most favorable.

“The governor has been clear that he’s out there every day competing for jobs, and what this report shows us is that Connecticut is an extremely competitive place to do business,” Gov. Dannel; P. Malloy’s spokesman, Andrew Doba, said Tuesday. “That’s part of the reason why we’re adding jobs at a faster clip right now than at any other point since the recession began.”

The premise behind the report is simple: It’s not sufficient simply to look at the total business taxes a state and its cities and towns levy on companies.

“Because state and local business tax bases include a diverse mixture of receipts — net income, input purchases, payroll, property and other tax bases — a broad measure of a state’s overall economic activity should be used to determine the measure of aggregate business tax burden,” the report states.

COST had ranked Connecticut as having the third-most-favorable business tax burden among all 50 states and the District of Columbia in the 2010-11 fiscal year.

Things changed in 2011 when, according to the study, taxes on businesses rose by 10.3 percent in the Nutmeg State –- the fifth-highest jump among the 50 states.

When Malloy took office in January 2011, nonpartisan state analysts were projecting a shortfall in the 2011-12 fiscal year of nearly $3.7 billion. That was an unprecedented margin that approached one-fifth of the annual operating budget.

To close that gap, Malloy and his fellow Democrats in the legislature’s majority approved $1.5 billion in new state taxes and nearly $100 million in new revenue that could be raised by cities and towns.

Another $350 million in new taxes on hospitals was ordered as well two years ago. Initially all revenues from that tax were returned to hospitals as part of a complicated arrangement to leverage more federal aid.

But now the state keeps about $200 million per year of that levy, requiring hospitals to treat more poor patients – and qualify for more state Medicaid payments – to compensate for those lost tax dollars.

Rep. Vincent J. Candelora, R-North Branford, a longtime member of the Finance, Revenue and Bonding Committee, said the new study “doesn’t fool anybody who’s in business” in Connecticut.

Candelora, whose family runs a wire manufacturing business and a recreational complex in North Branford, said it’s not enough to compare taxes with the total value of goods and services businesses produce.

If a state-by-state comparison is going to be fair, it must recognize that taxes are just one of the costs businesses face. And Connecticut, Candelora added, has some of the highest energy, health care, labor and transportation costs in the nation, as well as a hefty tax burden.

“It’s undeniable that Connecticut has good skilled labor,” Candelora said. “But what really keeps us here as a business is we’re third generation and our family roots are here. We know it’s a bad business decision to stay here in Connecticut, but we stay here for our families, and that’s sad.”

Joseph F. Brennan, senior vice president of the Connecticut Business and Industry Association, said there are some insights to be gained from the study, but it has some shortcomings as well.

“In reality, it is hard to single out any one factor” to determine the burden placed on businesses, he said. Besides taxes, other business costs, and productivity, lingering fears over the last recession and growing confidence in the stability of the state budget also come into play.

“We do think Connecticut is a great place to do business,” Brennan said. “But a lot of people in the community are concerned about the rate of [tax] increase, and that can cause some limitations” on when companies look to grow.

“If you’re a business,” he added, “you’re looking at the total cost.”

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