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Tax Foundation Testifies in Connecticut

3 min readBy: Joseph Bishop-Henchman

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Yesterday, I was up in Hartford to give testimony to the Connecticut State TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Panel, a body tasked by the legislature with studying and improving the state’s tax policy. Connecticut has struggled with a business tax hike included in the biennial budget this year, so much so that Gov. Dan Malloy backed away from his support of some of the increases in June, though he had already signed the increases into law.

My full testimony is attached in PDF form at the end of this post, and below is an excerpt.

[…] I would like to share an analysis we recently released called Location Matters: The State Tax Costs of Doing Business. This major study calculates the total tax cost faced in each state by seven hypothetical businesses: a corporate headquarters, an R&D facility, a retail store, a capital-intensive manufacturer, a labor-intensive manufacturer, a call center, and a distribution center.

Our economists developed profiles for each of these firms based on comparative data: so many square footage, so many employees, and so forth. We then worked with the auditA tax audit is when the Internal Revenue Service (IRS) conducts a formal investigation of financial information to verify an individual or corporation has accurately reported and paid their taxes. Selection can be at random, or due to unusual deductions or income reported on a tax return. , tax, and advisory firm KPMG LLP to calculate the tax bills for each of these firms in all 50 states. We included all applicable state and local taxes, including corporate income taxes, property taxes, sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. es on business inputs, unemployment insurance taxes, and franchise taxes. We calculated the tax bill twice: once for a new firm eligible for available incentives, and once for a mature firm that generally cannot access such incentives. We used the tax code as it stood on April 1, 2014, the most recent date where we had all available data from all 50 states. It does not include federal taxes: just state and local taxes.

Connecticut’s results are attached to this testimony. A hypothetical corporate headquarters, for example, would pay a 19 percent effective tax rate to Connecticut, the 44th lowest (or 6th highest), beaten only by New Jersey, Washington state, Iowa, Minnesota, Pennsylvania, and New York. A hypothetical R&D facility would pay a 14 percent total tax rate, 42nd lowest (or 8th highest). Distribution centers, call centers, and retailers also would have relatively high tax bills in Connecticut. Manufacturing facilities, by contrast, face relatively lower tax bills.

The main driver of these results is the state’s high corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. and the surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. . While Connecticut offers generous credits to some firms, the credits in most cases cannot overcome the high tax rate. The state’s capital stock tax, one of only 18 left in the United States, is also a contributing factor.

As I expressed previously, taxes are just one component of what makes a successful economy able to retain talent and encourage innovation. But the real-world impact of Connecticut’s tax system is important to understand as you consider a tax structure that works best for the state, that is friendly to economic growth, and that balances a number of important priorities. […]

For my full testimony, including excerpts from Location Matters, click the PDF button below.