July 1, 2006

Improving the Connecticut Business Tax Climate

Download Special Report No. 144

Special Report No. 144

Executive Summary The Tax Foundation’s 2006 edition of the State Business Tax Climate Index ranked Connecticut’s business tax climate as 39th best in the country. With only 11 states ranked worse, Connecticut should use its revenue surplus to improve its business tax climate.

Governor Rell has been on the right track with suggestions to eliminate the state estate tax and the corporate income surtax. She has also pushed to cut a local property tax that would force the state to reimburse localities. Predictably, some legislators would prefer to spend the surplus, and some have even talked about raising taxes. The Connecticut legislature should follow the Governor’s lead –– though not necessarily on the local property tax — and use the surplus as an opportunity to make fundamental changes to the state’s business tax climate.

The University of Connecticut has recently observed that the state enjoyed bigger job gains by cutting its statutory tax rate on corporations than by carving out special exemptions and deductions for targeting industries or firms. Similarly, the Tax Foundation has observed that states get a bigger boost by repealing a tax, even one that collects comparatively little revenue, than they get by enacting a small cut in a bigger tax. That’s because total repeal eases the administrative burden as well as the tax burden, and in the fierce interstate competition for business, no marketing tool is better than a zero rate.

The State Business Tax Climate Index points to two areas ripe for reform in Connecticut: sales taxes and wealth taxes. Specific changes are detailed below. If Connecticut had entered the current year with these changes already on the books, its ranking in the Index would have been 21st best overall instead of 39th, greatly improving Connecticut’s standing in the tax competition for new jobs.

A 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.

A 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.

A 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.

A wealth tax is imposed on an individual’s net wealth, or the market value of their total owned assets minus liabilities. A wealth tax can be narrowly or widely defined, and depending on the definition of wealth, the base for a wealth tax can vary.