It is quite frustrating to see an almost continuous repetition of the mythologies that people invoke to explain Connecticut’s economic malaise. The three mythologies are 1) Connecticut is a high tax state; 2) housing is too expensive; 3) energy costs are too high.
Even to the extent they are true, they have virtually no relevance to charting a path to full recovery. This post only addresses the first question of tax burden. Later posts will address the other two mythologies. And at the conclusion of each post I will suggest what the real reasons for Connecticut failing for more than 25 years to create net new jobs and a strong business climate.
Tax burdens: the most recent Ernst & Young analysis of business tax burden, aggregating state and local taxes, puts Connecticut as SECOND LOWEST in the nation, trailing only Oregon. It is true that tax burdens varied dramatically among businesses, and we need to look at tax incidence comprehensively. But it is simply not the case that Connecticut has high business taxes on average; they are among the lowest in the nation. Now let’s add to this that taxes never figure as primary drivers in business location decisions. Even if business taxes were higher in Connecticut, there is simply no evidence that they would play a major role in location decisions.
For households, tax burdens, aggregating state and local taxes, are in the middle range nationally, based on the Boston Federal Reserve analysis. Again, there are significant disparities, and Connecticut taxes are generally regressive, with lower income households paying a significantly higher share of their income in sales and property tax (they rarely pay much state income tax.)
The mythology, constantly repeated and displayed prominently by groups such as Connecticut Business and Industry Association, finds its primary support in the Tax Foundation studies. But that study does NOT say to whom the taxes are paid. Because many of the highest income Connecticut residents work in New York City and thus pay both New York state and New York City income tax, those taxes are counted against Connecticut; because many wealthier households in Connecticut own property in Florida or on Martha’s Vineyard, the heavy property taxes they pay there are counted against Connecticut. If you read the Tax Foundation study closely, you find that the study makes this exact point: it is only showing who pays the highest taxes, not to whom those taxes are paid.
A principal reason people in Connecticut often believe they have a heavy tax burden — beyond the constant repetition of the assertion — is that Connecticut is more heavily dependent on highly visible taxes — sales, income, and property — than other states. David Walker and I emphasized this point in the study “Navigating to Prosperity” — readily available online.
Bottom line: Connecticut does not have in aggregate a heavy tax burden. Even if it did have higher rates, there is no evidence in the extensive research on business location decisions to support the idea that tax burden plays a major role in such decisions. Critically, marginal changes in sales or income taxes will, in all likelihood, have little or no impact on Connecticut’s economic performance or significantly change its competitive position, especially in the short run.
A caveat: Connecticut is excessively reliant on the property tax, which is stunningly unequal across the state, and the sales tax is complex, with more than 600 exemptions, an almost incomprehensible business-to-business structure, and difficult for the Department of Revenue Services to track. A comprehensive reframing of revenue sources, including vastly simplifying, broadening, and lowering the sales tax, and learning from best practice in other states would both make the tax system more transparent, easily to administer for both the private and public sectors, and, in the long run, play a meaningful if modest role in improving the state’s business environment.
The Overview of Why Connecticut is Struggling to Recover its Economic Vitality:
Connecticut is working to recover from a trifecta of policy failures that extend back more than 20 years because it failed to invest in and strengthen its infrastructure and its human capital.
In 1992, Connecticut had no research universities in the modern sense of generators of significant intellectual property that then moved into the private sector, either through licensing or spinoffs. Yale University, under President Richard Levin, recognized that, and transformed itself. The University of Connecticut is only now beginning that process. And Connecticut is still far behind other states in developing strong worker training programs/pipelines critical to sustaining and attaching business.
For years, Connecticut also failed to create and sustain coherent, economic development policies and programs, or appreciate the value of central assets in the state’s economy. The poster child is the closure of our state parks and forests, which recent analysis revealed deliver more than $35 for every dollar of public expenditure, and the refusal to pay dues to the New England Tourism Council, which resulted in Connecticut disappearing into Long Island Sound and the Atlantic Ocean. This when tourism is at least 15 percent — and probably more — of the state’s economy. The Legislative Review and Investigations Committee issued a scathing report in 2009 that highlighted the persistent, pervasive ineptitude and weakness in this area.
We have begun to address these systemic, fundamental failures. We have been digging an economic/business hole for ourselves for more than a generation; there is no quick way to climb out. Though there is no easy path to recovery, Connecticut has extraordinary locational advantages and powerful underlying assets. If we address these failures and marshal those assets on a sustained basis, we will recover, with increasing success, and again become one of the top performing state economies.
Fred Carstensen is an economics professor at the University of Connecticut.
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