The Tax Foundation”™s latest annual business tax report ranked Connecticut as having one of the 10 worst tax climates for businesses.
In a report released Oct. 9, the state ranked among the bottom half of all states on its property tax (49th), corporate tax (35th), income tax (33rd) and sales tax (32nd). However the report doesn”™t paint an accurate portrait, says Kevin B. Sullivan, commissioner of Connecticut”™s Department of Revenue Services.
Recalling common criticisms that say the Tax Foundation is “too ideological” rather than nonpartisan, Sullivan said he prefers to rely on analyses by the Council on State Taxation. According to COST, Sullivan says, the state has a relatively low tax burden on businesses.
The Business Journal asked Sullivan to explain his viewpoint further.
FCBJ: Are the taxes on Connecticut businesses high or low compared to other states? How do you know?
Kevin B. Sullivan: “The 2012 report of the governor”™s business tax task force found that Connecticut”™s comparative business tax burden is low to moderate ”” except state taxes on business-to-business services and local property taxes. This is confirmed by the single most reliable and respected, business-funded, tax think tank, the Council on State Taxation.
As recently reported by COST ”” based on analysis performed by Ernst & Young ”” Connecticut ranks as the second lowest in the nation at 3.6 percent in total effective state and local business taxes, as a share of private sector gross state product; and the lowest in the nation at 30.4 percent in the overall business share of total state and local taxes.
COST”™s methodology is very inclusive in terms of total business taxes (and includes) property tax, sales tax, excise tax, corporate income tax, unemployment insurance tax, individual income tax on pass-through business income, all other taxes paid by businesses directly or indirectly, and license fees. The methodology used by the Tax Foundation is not only less exhaustive but actually ranks states with lower economic productivity relative to taxes higher than states, like Connecticut, with higher economic productivity relative to taxes based on a less-than-objective belief that no tax is better than any tax, no matter what the economic impact or consequences.”
What are the primary taxes Connecticut businesses pay? How much revenue does it amount to for the state?
KS: “Using COST”™s statistics for comparability, Connecticut state business taxes for FY 2012 were:
1) Sales taxes at $1.8 billion, 2) Excise taxes at $1.2 billion, 3) Individual income tax on pass-through business income at $800 million, 4) Unemployment insurance tax at $800 million, 5) Corporate income tax at $600 million and 6) License fees and other taxes at $300 million. Connecticut local property tax paid by business for 2012: $2.1 billion.”
About 5 percent of all tax revenue comes from corporate taxes, whereas 11 percent came from businesses 10 years ago. Why has this changed?
KS: “The major changes in Connecticut”™s state business tax profile over the past 20 years or so are: 1) The shift in business organization from c-corporations that pay corporate income tax to partnerships, limited liability companies and similar non-c business organizations where individual principals and investors pay personal income tax upon net business income distribution and 2) Elimination of what were double-digit tax rates on capital gains, dividends and interest income prior to enactment of the state income tax.”
Taxes on businesses and individuals are a balancing act. How do you know when it”™s the right balance? Do we have a good balance now?
KS: “All taxes are about balance. For state business taxes, Connecticut is better balanced today in terms of fiscal stability, tax stability and tax burden. The exception in Connecticut is the imbalance that results from significant reliance on local property taxes.”
Anything else we should know?
KS: “America has an anti-tax popular culture that tends to exaggerate tax impact. It is also easier to fixate on taxes rather than the harder-to-solve other areas where Governor Malloy is working to make Connecticut more business friendly: energy costs, transportation and other infrastructure, housing costs, education, workforce training and state economic development policies that focus on higher value added and emerging economic sectors. Similarly, state taxes are a relatively modest factor in business decisions overall but can be important in specific cases.”
Thoughtful, useful article. Good work.