Connecticut’s Value Proposition Has to be Something More Than Being a Tax Shelter

It has been sad to read the aggressive posturing about the state budget from the business community and now from the Connecticut Conference of Municipalities. Connecticut has always been a place where we have tackled our toughest challenges together. I worry that this could be the one time that we do not manage to surmount these challenges and people are merely scrambling to preserve their own interests. We can do better.

This conundrum is not a 2015 conundrum, it is the result of choices that were made in the past. Some of these choices involved hiring employees and agreeing to provide them with a stable retirement. Another portion involves choices about money we bonded. These expenses are supposed to be investments that pay returns in the future. Our word is our bond, so we generally do not get to change these.

The rest of the budget involves the day-to-day operating expenses of our government. Salaries are paid, pens are purchased, water and electricity are funneled into buildings. We have flexibility here: we can turn off the lights at the DMV, we can choose to eliminate services for needy children, or stop funding foreclosure mediation programs. In a world where we have already been cutting spending, the trade-offs look increasingly bleak.

We fund our budget with taxes. Money that you and I pay for the privilege of driving on our roads, having courts protect our rights, and preserving our environment. Not all taxes are created equal. Putting a high tax on something can discourage people from purchasing it. That is why some groups champion cigarette taxes or carbon taxes. The impact of the taxes on economic activity are subject to elasticity of demand. No matter how much gas is taxed I am still going to drive my car to work; my demand is inelastic. Yet it is easy to skip the espresso at Starbucks.

Small businesses that need to be near their customers are forced to pay whatever taxes they need to pay to be here. Yet large corporations like GE have the option to spend their money to relocate offices and people if they think it will save them money in the long run. I have a copy of the tax code on my desk and it is a couple inches thick. GE pays its lawyers enormous salaries to help them understand the tax code and shape their business decisions around it. Small business owners are often too busy trying to innovate or sell their products to bother doing that.

In a perfect world we could keep our tax rates flat. Our revenue would approximately reflect the growth (or lack thereof) of the general economy and our expenses would increase at a similar rate. Your company would give you a raise and the government is better off by collecting more taxes both on your income when you make it and again when you finally use it to buy a new Apple Watch. Unfortunately, our tax code is not nearly broad enough to reflect the success of our economy.

Commerce has shifted from retail stores to the Internet, where for a long time we were not collecting sales taxes on physical goods. We also face the fact that software has been eating the world. Instead of buying CDs taxed at 6.35 percent we now buy iTunes songs or Spotify subscriptions taxed at 1 percent. Instead of buying paper books we buy Kindle books. Instead of buying a Garmin GPS we download Google Maps, supported by advertising that is tax exempt. The favorable sales tax rate for digital goods and advertising is the biggest consumer tax cut in the history of our state, and it is insane to think that it can be sustained forever unless everyone buys exponentially more.

Some worry that taxing data processing and similar services will lead to less of it, but they are wrong. Investments in data and technology provide enormous benefits, much larger than their cost. A company that has to cancel a project because of a higher tax rate on software and data services probably does not know what they are doing. The only losers will be the companies that are not providing value.

If we hope to attract more people to our state and win the war for talent, our value proposition has to be something more than serving as a tax shelter. Gov. Dannel P. Malloy is right that we should invest in things like transportation and education. People choose Connecticut not just because their jobs are here but because of our world-class schools, delicious restaurants, and easy access to New York City and Boston. If State Comptroller Kevin Lembo has his way the benefits of living here will soon include gigabit Internet across the state.

Finally, if we hope to grow our economy we should worry less about playing defense on the sure things, and play offense with lots of uncertain things. A venture capital approach to economic development. Instead of giving millions of dollars in tax credits to large production studios or GE, this kind of money should be directed toward smaller companies that can grow at a faster rate.

For our economy, one hundred companies growing from 10 to 20 employees is more valuable than one company growing from 1,000 to 2,000 employees. The risk of any one firm leaving is spread, and the capital invested could lead to a few home runs that could transform a region. How is a startup wind turbine builder supposed to compete with GE when their tax rates are so different?

Matthew Zagaja is a lawyer who also is a member of the Wethersfield Democratic Town Committee. He can be reached on Twitter @mzagaja.

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