General Electric Leaves Connecticut

General Electric (GE) is expected to announce on Thursday that it is relocating its corporate headquarters from Connecticut to Boston. The move follows a contentious fight in Connecticut over the state’s corporate tax structure.

In 2015, Governor Dan Malloy and the legislature pushed through a slew of corporate income tax increases. The state’s budget included $500 million in new corporate tax revenue. The largest change was switching the state to combined reporting. Combined reporting changes how businesses treat the income of affiliated subsidiaries. Under combined reporting, a corporation must include income from its subsidiaries in its tax calculations, instead of each component being taxed individually. The plan also increased the sales tax on data processing from 1 percent to 3 percent.

General Electric threatened to leave Connecticut over the changes. Combined reporting would increase General Electric’s tax bill substantially. It would subject a greater proportion of General Electric’s profits to Connecticut’s high 9 percent tax rate, one of the highest in the nation.

Quickly after passing the tax increases, Governor Malloy reversed course. He agreed to delay the change to combined reporting until 2016 and delay the tax increase on data processing. But those efforts were not enough to keep General Electric in the state.

With the move to Massachusetts, General Electric is moving to a much more favorable tax climate. In the State Business Tax Climate Index, Connecticut ranks 44th. Massachusetts ranks 25th.

In some ways, the states are very similar. Massachusetts’ corporate income tax rate is 8 percent, still a high rate. It also has combined reporting.

The large difference in the states is their individual income tax structure. General Electric employees, including those making the relocation decision, likely care about the tax rates that they pay personally. Connecticut’s individual income tax has seven brackets with rates as high as 6.99 percent. Massachusetts has a flat income tax at 5.1 percent.

Even more important to the decision could be the direction in which Connecticut is headed. Connecticut has increased taxes several times in the last several years. Governor Malloy campaigned in 2014 promising not to increase taxes, but then he supported tax increases in 2015. A study committee is expected to report its suggestions on tax reform in Connecticut in February. If General Electric stayed in Connecticut, would additional tax increases occur?

To sweeten the deal, Massachusetts and the city of Boston are expected to provide property tax abatements and other tax credits to General Electric totaling $145 million.

For now, General Electric made good on its promise to relocate. It becomes just another company that has chosen to relocate due to a state's decision to alter its tax code.