Arthur W. Wright

English

Research Papers in Economics

4 THE CONNECTICUT ECONOMY SPRING 2006
BY ARTHUR W. WRIGHT
Connecticut’s State fisc is showing a
pleasingly plump surplus of more
than half a billion dollars, so the tour-
nament has begun to see who can do
what for whom with the extra money.
Interestingly, Democrats in the
General Assembly have been talking
up cutting business taxes—not only
the ad hoc business surtaxes levied
to stem the tide of red ink when per-
sonal-income and sales tax revenues
plunged in 2001, but also more per-
manent measures such as the local
property tax on business machinery.
Now, Democrats advocating reduc-
tions in business taxes is newswor-
thy.  So what’s going on here? For one
thing, business surtaxes tend to
come and go, or rather go and come,
with the revenue cycle, and revenues
are flush again.  But the leaders of
both houses—Senate President Pro
Tempore Donald E. Williams, Jr., and
House Speaker James Amman—are
also sounding a more strategic note:
proposing business tax cuts to
improve the business climate and
shore up Connecticut’s competitive-
ness.  (See the related opinion piece
on our back cover by Senator
Williams.)  
The Democrats’ mood suggests
they’re feeling penitent, even guilty,
about the current state of Connecticut
business taxes—for which they bear
much of the blame, having controlled
the legislature lo, these many moons.
Speaker Amann was quoted in the
Hartford Courant in January as want-
ing to work with business and cease
being “a burden as we have been”.
Mea culpa. 
While humility in high public
office is to be welcomed, in this partic-
ular case it raises a question: Is business
taxation in this state really in such
a…well, sorry state?
Turns out Connecticut is not an
especially high-tax state for businesses,
when compared with its 49 peers
around the country.  According to an
ongoing research project sponsored by
a big-business trade association, the
Nutmeg State ranks among the lowest
states on a number of different meas-
ures of the relative state-and-local tax
burden on businesses.
This is not to argue against any of
the proposed cuts in business taxes,
which frankly sound pretty good to
this writer.  But it does suggest two
points: (1) Connecticut may want to
consider advertising itself as a low-tax
state for business, and back it up with
good-news data; and (2) doing so
could remove the need for the State to
offer the welter of tax breaks it now
pushes in its economic-development
efforts.  (The State Department of
Revenue Services’ Guide to Connecticut
Business Tax Credits runs to some 70
pages.  And the “You Belong in
Connecticut” website of the
Department of Economic and
Community Development features an
entire section on “Tax Credits and
Incentives”.)  Long shopping lists of
“tax incentives” may even make it
sound as though we are a high-tax
state, when in fact the opposite is true.
HOW DO WE STACK UP AGAINST
OTHER STATES?
The Council On State Taxation
(COST), a trade association com-
prised of nearly 600 corporations
doing business in multiple states and
nations, has been gathering and ana-
lyzing comprehensive state data on
Connecticut Business Taxes
In Perspective
Let’s ask ourselves: 
Is business taxation 
in Connecticut
really in such a 
sorry state?SPRING 2006  THE CONNECTICUT ECONOMY 5
business taxes going back to 1980.  To
do the studies COST has hired a
research team led by Robert Cline and
other tax researchers affiliated with
Ernst & Young, the large international
public accounting firm.  The resulting
reports are released publicly in full
detail, and also published in a national
weekly journal for tax professionals.
The most recent report is R. Cline et
al., “Total State and Local Business
Taxes: Nationally 1980-2004 and by
State 2000-2004,” State Tax Notes, May
9, 2005, pp. 423-437.*  This version
used data for FY 2004 and incorporat-
ed some comparisons with FYs 1980-
2000.
The COST studies measure “busi-
ness taxes” comprehensively: property
taxes paid by businesses on land,
improvements, and (in Connecticut
and a few other states) equipment; sales
and excise taxes on inputs purchased by
businesses (e.g., printer paper or semi-
finished goods); gross receipts taxes;
corporate income and franchise taxes;
license taxes; unemployment payroll
taxes; and “individual income taxes
paid by owners of noncorporate
(passthrough) businesses” (partner-
ships, sole proprietors, and S-corpora-
tions).
By that definition, Connecticut’s
business taxes came to $6.0 billion in
FY 2004, out of total state-and-local
revenues of some $17.4 billion.
Referring to column (1) in the first
table below, the implied share of
34.3% put us third from the bottom,
above only Maryland (at 33.7%) and
Oregon (at 33.8%).  At the high end of
the scale are a lot of states with big
mineral royalties (led by Alaska and
Wyoming at about 73% and Texas at
over 60%).  But our near-neighbor
New Hampshire, which extracts little
in the way of minerals (except for a bit
of igneous rock), registered a whop-
ping 55.6%, more than 20 percentage
points (or some 60%) above
Connecticut and Massachusetts.  The
ratios for the other three New England
states, plus New York and New Jersey,
were around 40%—not far from the
50-state average of 43% of all state-
and-local taxes.
Cline  et al. also looked at state-
and-local business taxes in proportion
MEASURES OF BUSINESS TAXES IN CONNECTICUT, NEIGHBORING STATES, AND THE U.S.
“Business taxes” are
property taxes, 
sales taxes on inputs,
gross receipts taxes, 
corporate income taxes,
license fees, and 
personal taxes on
“passthrough” income.
Source: Cline et al.
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P6 THE CONNECTICUT ECONOMY SPRING 2006
Connecticut, and 
most of the
rest of New England,
put a whole lot lighter
“touch” on business in
2000-2004 than 
much of the rest of the
country.
to private state gross state product
(GSP).  In column (2) of the same
chart, in FY 2004 Connecticut was in
a four-way tie for 6th lowest, with
Colorado, Georgia, and Missouri, at
3.8%.  Massachusetts was right behind
us with 3.9%, but the other four New
England states were all above the 50-
state average of 4.7%.  (Alaska and
Wyoming have the two highest shares,
probably from those states’ mineral
royalties.)
What about the change in state
and local business taxes during the
recent prolonged revenue crunch at
the beginning of the 21st century?  As
noted earlier, Connecticut did impose
some business surtaxes to cushion the
hard landing during the worst of the
crisis.  But Cline and his colleagues
found that, while Connecticut’s busi-
ness taxes rose by 5.2% over the peri-
od FY 2000-2004,  overall state-and-
local revenues rose faster, by 6.3%.  As
shown in column (3) of the first table,
that gave business taxes only a 29%
share in total revenue growth, put-
ting us 4th from the bottom, above
Alaska (0%), Montana (17%) and fel-
low-New-Englander Maine (24%).  In
contrast, during the same period
Massachusetts and New Hampshire
relied much more heavily on business
taxes for revenue growth, at 51% and
64% respectively.  Even so, our neigh-
bor immediately to the north still
came in about at the 50-state average
of 52%.  Thus, Connecticut, and most
of the rest of New England, put a
whole lot lighter extra “touch” on busi-
ness in 2000-2004 than much of the
rest of the country.
Turning to the composition of
state-and-local business taxes, the table
below compares the shares of the four
tax categories—in columns (1)-(4)—
that account for three-quarters or
more of such taxes in New England
plus New York and New Jersey and the
U.S.  The three tax categories omitted
are “excise and gross receipts”; “pay-
roll”; and “licenses and other”.  
One surprise may be that the
COST study found Connecticut busi-
ness property taxes (column 1) right
at the 50-state average of 36.9% of all
business taxes.  And that figure
includes the relatively rare local tax on
business machinery, which Senate Bill
1 in the current General Assembly ses-
sion would repeal.
Less surprising may be the com-
paratively high Connecticut share of
business taxes accounted for by sales
taxes on business inputs, 25.5%—2
full points above the 50-state average
of 23.5% (column 2).  Compared with
Washington state, which has no retail
sales tax but collected nearly half
(46.7%) of its business taxes from this
source, we look like softies.  But we’re
letting Massachusetts (13.9%), never
mind New Hampshire (0.0%) and the
likes of New Jersey or Virginia, gain a
step on us here.
SELECTED SHARES OF TOTAL BUSINESS TAXES
Source: Cline et al., Table 4, pp. 430-1. 
S
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sSPRING 2006  THE CONNECTICUT ECONOMY 7
Of course, we may gain back that
step and then some on corporate
income taxes (column 3).  Our mod-
est share here, a quarter below the 50-
state average of 5.7% of total business
taxes, makes Connecticut look good
compared with the markedly higher
figures in Massachusetts, New York
and New Jersey.  No-sales-tax New
Hampshire, at 18.0%, wins the booby
prize nationwide, even edging out oil-
producer Alaska (17.6%).  New
England neighbors Rhode Island,
Maine and Vermont all join the
Nutmeg State below the 50-state aver-
age. 
Finally, in column (4) Connecticut
shows up with a relatively high share of
business taxes classified as individual
income taxes on passthrough busi-
ness income—6.7% as against the 50-
state average of only 3.8%.  Other
overachievers in this category include
Massachusetts (5.9%), New York
(6.8%), Colorado (6.4%), and Oregon
(9.0%).  Possible reasons include a vig-
orously entrepreneurial population, or
just above-average personal income tax
rates.  Note, however, that the person-
al rates in Connecticut, Massachusetts,
and Colorado are not especially high,
according to data published by the
Federation of Tax Administrators
(www.taxadmin.org/fta/rate/ind_inc.h
tml).
THE MEANING OF IT ALL
There’s no disputing that job
growth has been sluggish in the
Nutmeg State.  But the data just
reviewed make it hard to argue that the
main source of this ooze is an undue
burden of business taxation.
As suggested earlier, if the data
show it, why not trumpet to the world
that Connecticut is a low-tax place to
do business?  To make such a claim
ring truer, of course, we still have some
work to do.  For one, we would do well
to shed the ability of municipalities to
tax business machinery, as Senate
majority leader Williams advocates.  At
present, Connecticut is the only state
in the region that permits cities and
towns to do that.  (In fact, “repeal” of
this tax actually would mean changing
what the State allows its cities and
towns to tax, and replacing their lost
revenues with State grants.)  We must
not forget that the growth of demand
for labor is retarded by a tax on a com-
plementary input like capital.
There’s also room for improve-
ment in the way Connecticut imposes
sales taxes on businesses’ purchased
inputs.  It is sobering that the share of
this business tax in nearby
“Taxachusetts” is just over half as big as
it is in Connecticut.  Setting sales taxes
on inputs can be tricky—applying
sales taxes at intermediate stages of
production may influence how busi-
nesses structure their organizations—
but the COST study data do suggest
that Connecticut should try to ease the
business tax burden in this category.
* Disclaimer: I have been an unpaid director
of the publisher of State Tax Notes, Tax Analysts,
since its inception in 1970.  Another current
director, also unpaid, is a tax professional at
Ernst & Young.  Neither of us has any involve-
ment in the study cited.  I came across this study
in doing research for this piece, not via Tax
Analysts.
The data make it 
hard to argue 
that the main source 
of sluggish job growth 
is business taxes.

Connecticut Business Taxes In Perspective

http://cteconomy.uconn.edu/articles/AW_S2006.pdf

Connecticut Business Taxes In Perspective

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