Connecticut residents and lawmakers grappling with the state’s fiscal challenges should start the New Year with one goal in mind: to build thriving communities across our state. Economic development policy should focus on investing in our people and our workforce by protecting the public systems that undergird a strong economy such as education and health care. Despite the headline-grabbing “business climate” rankings that bear little relationship to economic growth or actual tax climates, there’s more to economic development and tax policy than rates alone —businesses seek educated and productive workforces because it pays off.
According to a report prepared by Ernst & Young LLP for the Council on State Taxation (COST), a trade association consisting of more than 600 multistate corporations, Connecticut had the lowest ratio —3.5 percent— of state and local business taxes to the private sector gross state product (GSP) in Fiscal Year 2015 (FY 2015). The total effective business tax rate (TEBTR) is an absolute measure that captures business tax rates as a share of the overall economy. For Connecticut, our low TEBTR is in part driven by high-output industries.
Connecticut tied for lowest total effective business tax rate in the nation
FY15 Business taxes as a share of state, local and total taxes, and private sector GSP
| Total State and Local Taxes ($ billions)
Business Total | TEBTR | Business Taxes Per Employee (thousands) | ||
| CT | $7.9 | $27.3 | 3.5% | $5.3 |
| ME | $3.2 | $6.8 | 6.7% | $6.2 |
| MA | $16.9 | $43.8 | 4.1% | $5.4 |
| NH | $2.7 | $6.0 | 4.2% | $4.7 |
| NJ | $25.5 | $62.4 | 5.1% | $7.4 |
| NY | $71.9 | $172.8 | 5.8% | $9.1 |
| RI | $2.6 | $6.1 | 5.4% | $6.2 |
| VT | $2.0 | $3.7 | 7.7% | $7.4 |
Council on State Taxation
Connecticut businesses reap the benefits of high quality public systems such education, transportation and health care for a very low cost.
Ernst & Young found that for every dollar of government spending that benefits business in Connecticut, business pays only 80 cents (assuming that 50 percent of education spending benefits business). That’s considerably less than the $1.12 businesses paid nationally —third lowest in the nation, in fact— and the $1.20 paid in Massachusetts and New York, for every dollar of government spending that benefits businesses.
This impressive return on investment is a result of the state’s commitment to a highly-educated workforce, which ranks fifth highest in the percentage of the population holding a bachelor’s degree in the country, and fourth highest for holding a graduate or professional degree.
Businesses in Connecticut benefit from government spending
FY15 Business taxes per dollar of state and local government spending benefiting business
| Assuming 25% of education spending benefits business | Assuming 50% of education spending benefits business | |||
| Total state and local spending benefiting businesses | Tax-benefit ratio | Total state and local spending benefiting businesses | Tax-benefit ratio | |
| CT | $6.5 billion | 1.2% | $10 billion | 0.8% |
| ME | $1.5 billion | 2.2% | $2.2 billion | 1.5% |
| MA | $9.3 billion | 1.8% | $14.6 billion | 1.2% |
| NH | $1.6 billion | 1.7% | $2.4 billion | 1.1% |
| NJ | $14 billion | 1.8% | $22.4 billion | 1.1% |
| NY | $40.1 billion | 1.8% | $61.1 billion | 1.2% |
| RI | $16.6 billion | 1.7% | $24.4 billion | 1.1% |
| VT | $1.2 billion | 2.1% | $1.9 billion | 1.4% |
| U.S. | $432.2 billion | 1.64% | $633.5 billion | 1.12% |
Council on State Taxation
Finally, the report finds that in no other state do businesses pay a lower share of total state and local taxes than in Connecticut. The authors note that individual income taxes “outweigh” business tax collections in part because of a relatively large share of high-income earners, but we know that nationally, state corporate income tax collections have grown much slower than corporate profits, and in Connecticut, the decline in corporate income tax collections is in part due to the outsized growth in business tax credits and sophisticated corporate tax avoidance strategies.
Council on State Taxation
Lawmakers seeking to protect the state’s long-standing investments in human capital — investments this report proves invaluable— should consider these findings when seeking a balanced approach to the state budget deficit.