Study finds Connecticut’s business tax burden is lightest in the nation

Despite its reputation as an expensive place to do business, Connecticut’s state and local governments imposed the smallest tax burden last year of any state when compared with its economic output, according to a new study released by a trade group for major corporations.

The survey prepared for the Council on State Taxation found that while its neighbors imposed tax burdens that ranged between 4.3 and 6.2 percent of gross state product, the $22.9 billion that Connecticut businesses paid represented just 3.3 percent of the state’s economic output. The national average was 5 percent.

The study, prepared by Ernst & Young, one of the four largest professional auditing firms in the world, analyzes not only state corporation, income and unemployment taxes and municipal property levies, but also reviews taxes and fees tied to unemployment, public utilities, corporate licensing, and insurance.

Connecticut Voices for Children, a New Haven-based, nonprofit public policy group, said Wednesday that while Gov. Dannel P. Malloy’s recently announcement of tens of millions in new state aid to companies creating jobs, he and legislators should instead focus on lowering energy costs and improving health care and education.

“For many years, Connecticut’s economic development efforts have been heavily focused on tax subsidies for big businesses,” said Wade Gibson, senior policy fellow at Connecticut Voices, who noted COST has ranked Connecticut’s tax burden near the bottom of all states for seven years now. “In light of 20 years of anemic job creation, this study suggests that strategy is misguided.”

But Malloy’s budget director, Office of Policy and Management Secretary Benjamin Barnes, said Wednesday that while the administration has had considerable success this year, both at mitigating tax burdens on businesses and addressing related concerns such as energy, it can’t ignore other economic development options.

Over the past two weeks, Malloy has announced 75 million in total state grants, loans, tax incentives and other aid for companies pledging to create a minimum of 900 new jobs, and possibly as many as 1,500.

Though the state can’t entirely undo negative economic trends caused by national and international developments, “we can’t afford to discontinue our economic development efforts at a time like this,” Barnes said, adding that to those who say otherwise, “I would only point to our unemployment rate,” which remains above 9 percent.

Though the new state budget does impose a 20 percent surcharge on the corporation tax through 2013, the governor and legislature spared the $2.9 billion municipal aid program from any cuts that could translate to property tax hikes, Barnes said.

The COST study found that while total state taxes declined nationwide by 1.2 percent in 2010, local taxes jumped 2.3 percent and frequently were cited by businesses as larger concern.

“The budget was geared toward maintaining a competitive business tax environment,” Barnes said, citing “our often-stated goal of rebuilding the economy as the best way of stabilizing our fiscal future.”

Malloy, who repeatedly cited the state’s high electricity rates as an obstacle to business growth during last fall’s campaign, teamed with the legislature this past session to cancel a controversial surcharge on business and residential electric bills to help balance the state budget. That surcharge was eliminated by canceling plans to borrow nearly $647 million.

The Connecticut Business and Industry Association, the state’s chief business lobby, has challenged past studies that contrast tax burdens with statewide business productivity, arguing they don’t adequately assess the high cost outside of taxes that Connecticut businesses face.

“There’s a tremendous difficulty in doing any of these studies,” CBIA’s chief economist, Peter Gioia, said Wednesday, arguing that one of the single-largest costs Connecticut businesses face — the higher salaries they must pay to keep workers here — isn’t reflected at all.

Many owners of small businesses in the state report their enterprise’s earnings through personal income taxes, rather than corporation taxes, and Gioia said he believes the study dramatically underestimates how much of Connecticut’s overall income tax revenue comes from businesses.”We have hundreds of hedge funds alone in this state,” he said.

Gioia added that if population-dense Connecticut’s tax burden and economic output were compared on a per capita basis, the state’s favorable standing likely would worsen.

And House Minority Leader Lawrence F. Cafero Jr., R-Norwalk, said the $1.5 billion in new state taxes Malloy and his fellow Democrats in the legislative majority used to help balance this year’s $20.14 billion state budget represent a huge new burden for already-struggling businesses and consumers in Connecticut.

“Connecticut isn’t the best, it’s the worst” place to do business, Cafero said Wednesday. “I don’t care who studied what. The cost of doing business is huge all over Connecticut.”

Cafero also criticized Malloy for signing into law a new mandate requiring companies with more than 50 employees to provide paid sick leave.