Recently, the Connecticut Business & Industry Association objected to several recommendations for solving the state fiscal crisis made by the Commission on Fiscal Stability and Economic Growth. One of CBIA's objections is that the commission's report "reflects an overreliance on an often-misinterpreted study and an underestimation of the recommendations' impact on business taxes."
The study the commission cited and CBIA objects to is called “Total State and Local Business Taxes,” and was published in August 2014. At the time the report came out it got quite a bit of attention in Connecticut, and I wrote an article for the Rep-Am about it. Interestingly, a co-author of the report said it was being misinterpreted. Apparently that hasn't changed.
So here is the article I wrote about it, published June 15, 2015:
Survey Co-Author: Stats Misused
By DAVID KRECHEVSKY
The organization that commissioned a study of the corporate tax burden in each state said Friday its findings “should not be interpreted to mean” that Connecticut is a low-tax state for business.
The study, “Total State and Local Business Taxes,” was published in August and estimated the business tax burden in each state for fiscal year 2013. It was produced by QUEST – the Quantitative Economics and Statistics practice of the international audit firm Ernst & Young – for the Council On State Taxation, or COST, a nonprofit trade association based in Washington, D.C.
In the past week, the 28-page study has been cited as providing proof that Connecticut’s business tax burden is among the nation’s lowest. The study was cited after General Electric Corp. and other major firms warned they would consider leaving the state if the General Assembly approved a two-year, $40.3 billion state budget plan with changes that would collect more than $720 million in business taxes over the two-year cycle.
Thursday, a coalition of organized labor and other advocacy groups delivered a letter of protest against GE to the Connecticut Business & Industry Association in Hartford. The letter questioned the company’s motives for threatening to leave the state and said the Ernst & Young report shows that businesses in Connecticut “pay the lowest of any state as a percentage of total taxes.”
THE STUDY REPORTS THAT CONNECTICUT BUSINESSES paid 28.9 percent of the total taxes levied by state and local government in fiscal 2013, 36 percent below the national average. It also reports that state and local business taxes were 3.4 percent of the private sector gross state product, which the study labels the “total effective business tax rate,” or TEBTR. Connecticut’s rate tied with North Carolina for second-lowest, just ahead of Oregon at 3.3 percent.
The study, however, includes a note with the TEBTR table, saying the rate measures the average tax burden on existing businesses in a state, rather than the marginal tax that would be borne by a company investing in a new facility. “For this reason, the TEBTR … is not a clear indicator of the competitiveness of a state’s business tax system in terms of attracting new investment,” the report states.
Andrew Phillips, a principal with QUEST and a co-author of the study, went further in response to questions about Connecticut’s results in the study. In an email, he said the study “should not be interpreted to mean that Connecticut is a low tax environment overall.
“Connecticut’s overall state and local tax collections are 57 percent higher than the U.S. average on a per-capita basis, and 15 percent higher when measured per dollar of personal income earned by state residents,” he wrote. “This finding can be significant for businesses attempting to recruit employees to work in their Connecticut facilities.”
Phillips also said that while the study appears to suggest Connecticut’s business tax level is far below the national average, that is a result of the state’s high gross state product, which ranks fifth overall on a per-employee basis. The state ranks that high in part because of the high concentration of financial services firms here, which account “for 16 percent of Connecticut GSP – double the national average of 8 percent,” he wrote.
On a per-employee basis, the state’s business taxes rank 27th out of the 50 states and the District of Columbia, “suggesting that Connecticut’s business taxes are comparable to the U.S. average,” he wrote.
While TEBTR is one way to gauge business taxes, “marginal tax rates are a more important determinant of economic growth,” Phillips said.
Another analysis by Ernst & Young, he noted, found that Connecticut’s taxes on new investments in manufacturing, headquarters, and business services facilities are 13 percent above the U.S. average.
“On several important dimensions, including the marginal tax rate on new business investment, Connecticut imposes higher-than-average state and local tax burdens,” he wrote.
That may be a major reason why private-sector employment in the state has grown just 1.2 percent over the past decade, compared with 6.5 percent nationwide, he added.
ACCORDING TO INVESTINGANSWERS.COM, the marginal tax rate is “the percentage of tax applied to your income for each tax bracket in which you qualify. … The more money you make, the higher the marginal tax rate for each tax bracket in which your income is taxed.”
Scott Drenkard, an economist and manager of state projects for the Center for State Tax Policy at the Washington D.C.-based Tax Foundation, said Friday that marginal tax rates are a more important gauge for businesses.
“Marginal rates really do matter,” said Drenkard, who is the author of the foundation’s annual State Business Tax Climate Index, which in 2014 ranked Connecticut 42nd, or ninth from the bottom. “The marginal tax rate is very important for business decisions. It affects how you spend the next dollar. It affects how you spend on the next project. Those are the decisions that really matter – will you hire another employee? Will you buy another machine? Will you engage in another sale? Those are the questions that impact growth.”
Earlier this week, the Commerce Department reported that Connecticut’s economy grew just 0.6 percent in 2014, one of the worst rates in New England and well below the national growth rate of 2.2 percent.
Friday, Gov. Dannel P. Malloy proposed changes to the legislature’s approved budget plan, some of which would delay or ease the tax impact on businesses. The legislature will consider the changes during a special session later this month.