Gov. Dannel P. Malloy has said it. Advocates for those with developmental and intellectual disabilities have said it. Labor union representatives have said it.
Connecticut has the second-lowest effective corporate tax rate in the nation, they all cried, citing a 2014 Ernst and Young report released in conjunction with the Council on State Taxation’s analysis of business taxes in Connecticut.
But that’s not what Andrew Phillips, the study’s lead author, said when the Connecticut Business and Industry Association trotted him out at a sunny, Monday afternoon press conference on the east steps of the state capitol.
“The results of the study should not be interpreted to mean that Connecticut is a low tax environment,” Phillips said. “Considering both household and business taxes, Connecticut’s overall state and local tax collections are 57 percent higher than the US average on a per capita basis and 15 percent higher when measured per dollar of personal income earned by state residents.”
Phillips is a principal in Ernst & Young’s Quantitative Economics and Statistics section and director of the firm’s Regional Economics practice. He said the oft-cited, second-best statistic is misleading because it looks at business taxes per dollar of private sector gross state product — a measurement that the report said does not accurately reflect the competitiveness of a state’s business tax system.
“This particular result is not a product of low taxes in Connecticut but rather is due to the state’s high level of productivity, which is 25 percent higher than the U.S. average on a current employee basis,” Phillips said. “When Connecticut’s business taxes are measured per employee, as opposed to per dollar of economic activity, Connecticut ranks 27th, suggesting that it’s actually comparable to the U.S. average.”
In the ranking of gross state product per employee, Connecticut comes in 5th highest in the country (behind Alaska, Wyoming, New York, and Delaware) which can be partially attributed to the state’s financial services industry, which accounts for 16 percent of Gross State Product.
Adrienne W. Cochrane, president and chief executive officer of the Urban League of Greater Hartford, said during the press conference that it’s imperative for the future of the nonprofit sector to keep these productive for-profit businesses in the state. Her organization’s goals of educational, occupational, and economic equality depend on support from the business community, she said; in fact, the group began with a jobs program 51 years ago that was entirely funded by Aetna.
Cochrane said losing corporate support amid declining state and federal aid could have a devastating effect on the nonprofit sector. “To lose the support of our corporate and business partners would strike a fatal blow to many nonprofit organizations,” she said.
But others in the social and human services community have taken a different stance, saying that tax increases are necessary to address chronic underfunding from the state.
Often during the governor’s budget negotiations over the past several months, Malloy has used the “second-lowest corporate tax rate” statistic to bolster his argument for raising taxes on General Electric and other big businesses in the state. When the moguls fought back, Malloy reversed course and said the $40.3 billion budget would need to be cut by 1.5 percent over two years to make up for the corporate taxes he wants to eliminate or reduce.
Malloy told lawmakers who narrowly approved a budget on June 3 that they can give him the power to make those cuts, or they can make the cuts themselves.
The $223.5 million in spending cuts, according to a draft document provided to CTNewsJunkie last week by the governor’s budget office, show the cuts will fall the heaviest on the departments of Development Services, Mental Health and Addiction Services, Social Services, and state colleges and the University of Connecticut.
For those concerned about the state’s financial future, Phillips said that there are more meaningful statistics to be found in the Ernst & Young study. He cited marginal tax rates on new investment as a better gauge of the state’s economic viability going forward.
In a marginal tax system, income is taxed at a higher rate as it rises. The Ernst & Young report found that Connecticut imposed 2014 marginal tax rates that were 10 percent above the U.S. average. That has important implications for the economy in a state where the private sector has only grown by 1.2 percent over the past decade compared to 6.5 percent nationwide, according to Phillips.
“As potential increases in Connecticut’s business taxes are debated, it’s important to keep in mind that the level of tax burden can be measured in several different ways and that on several important dimensions, including the marginal tax rate on new business investment, Connecticut is above average,” Phillips said.
Paul Timpanelli, president of the Bridgeport Regional Business Council and member of the Connecticut Institute for the 21st Century, said the state needs to change the way it does business. “We need structural change, we need changes in approach to how we tax individuals and businesses in this state and we need dramatic changes in the way in which we approach how we spend money in this state,” he said.
He pointed to recommendations made by the Connecticut Institute for the 21st Century over the past five years, which identified long-term care, the correction system, pensions, public services delivery, and technology as areas that must be addressed to ensure responsible and productive spending.
Madeline Stocker contributed to this report.