A report by Ernst & Young paints a different picture of Connecticut”™s state and local business taxes: As a proportion of how much money businesses make, the amount they actually pay in taxes is relatively low compared with other states.
But the Tax Foundation begs to differ.
According to the report, Connecticut tied with Utah as the third lowest rate with 3.6 percent of revenue paid in taxes in 2011. The national average was 5 percent. New York businesses paid 6.2 percent and New Jersey businesses paid 5.1 percent.
The rate, called the total effective business tax rate (TEBTR), is measured as a ratio of state and local business taxes to private-sector gross state product.
Connecticut”™s low rate results from its tax structure as well as the types of businesses in the state, said Andrew Phillips, senior manager at Ernst & Young QUEST. The state is more reliant on individual income taxes than most states, which means it”™s less reliant on business taxes.
“Connecticut”™s state and local governments collect 27 percent of their taxes through the individual income tax, as opposed to 20 percent nationwide,” Phillips said. “This means that while Connecticut business taxes are lower as a share of state GDP, individual taxes may be higher.”
The rate would seem to imply the state has low business taxes, but Scott Drenkard, an economist at the Tax Foundation, said there should be no misunderstanding: “Connecticut is a high”“tax state.”
The Tax Foundation, a nonpartisan tax research organization based in Washington, D.C., ranks the state in the bottom 11 in terms of business tax rates and structures. On tax burdens for citizens, it”™s ranked No. 1.
“They might measure well on one scale, but overall they”™re a high”“tax”“rate state,” Drenkard said.
It all comes down to the fact that Connecticut is a very rich state, so its tax revenues look low in comparison.
Being on the extreme end of the measurement invites discussion, said Chris Bruhl, president of the Business Council of Fairfield County, but he doesn”™t believe taxes are either high or low: “They”™re middle of the road.”
The structure of Connecticut”™s taxes is very complicated and sometimes unusual, Bruhl said. Some business industries and corporate structures are taxed more than others. And while the income tax is high, it affects only the highest wage earners, which are very few people.
Additionally, Bruhl suggested that the lower TEBTR rate could be due to the fact that Connecticut”™s businesses are often more productive and have lower tax rates generally. A consulting or financial ”“ service firm is taxed at a much lower rate than businesses that are dependent on natural resources, like many of the businesses in Alaska for instance.
Alaska had the highest TEBTR rate at 15.4 percent, but in the end, the tax burden on oil companies is really passed down to consumers out of state in the form of higher prices.
Bruhl is a member of Gov. Dannel P. Malloy”™s business tax policy review task force. It is looking at the practical impacts of business taxes and will make recommendations for a more competitive structure. The task force has completed two-thirds of the research process.
Regardless of whether business taxes are low, high or middle of the road, Bruhl said it”™s important to keep in mind that Connecticut has a very high quality of life. The quality of workforce and proximity to housing are consistently ranked higher on the list of priorities than tax rates for businesses, Bruhl said.
