While awareness has grown about the concept of tax fairness for individuals, little is understood when it comes to the reality of business taxes.
In Washington, as in Harford, much of the political debate has been revolving around the concept of whether all wage earners should be asked to pay their “fair share” in taxes. After maintaining the Bush Era tax cuts, President Obama has finally taken on a new and refreshing approach toward demanding that the wealthiest Americans pay a bit more in order to balance the budget and preserve vital services.
As readers of this blog know, here in Connecticut, the wealthiest among us pay about 5% of their income in state and local taxes while middle-income families pay 10% and the poor about 12% of their income go in state and local taxes.
Although Connecticut adopted record tax increases this past Legislative Session the fundamental lack of fairness in Connecticut’s tax structure was maintained.
At the same time there is an almost universal consensus that business taxes are high and that those high business taxes are hurting Connecticut’s economy.
While the “cost of doing business” in Connecticut is high, business taxes is NOT one of the primary reasons. According to the reputable Council on State Taxation, a national, non-partisan research group, Connecticut’s business taxes account for 3.3% of private sector economic activity (also known as private sector gross state product, GSP). That compares to the national average – in which 5.0% of private sector economic activity go toward state and local taxes.
Energy, healthcare, transportation and labor costs are all proportionately higher in Connecticut. Public and private sector leaders could do a lot more for Connecticut’s economy by looking to reduce or subsidize those cost drivers.
Perhaps even more importantly, the relatively low overall rate of business taxation hides a far more serious issue and that is that Connecticut’s business tax structure is a full of loopholes, tax credits and special exemptions that reward some business sectors while burdening others.
This problem is particularly clear when looking at Connecticut’s corporate tax credit program. The much touted UConn Center for Economic Analysis reported that of the 24 state corporate tax credits, 14 “led to net job losses, including one of Connecticut’s largest tax credits, the fixed capital investment credit.”
Back in 2005, the General Assembly’s Program Review and Investigation Committee even found that 16 of the tax credits programs “appear of little benefit to the state’s economy, and should be eliminated.”
Even Connecticut’s own Department of Economic and Community Development has reported that there are big problems with some of the state’s tax credit programs.
However, every time changes are even mentioned the call goes out that state government is trying to raise business taxes and efforts update and reform Connecticut’s tax credit program a thrown aside.
The Digital Media and Film Tax Credit is one that has gotten some attention but even then the changes were relatively small or made after Connecticut’s taxpayers paid out tens of millions of dollars in return for little or no benefit.
Case in point: Linda McMahon’s WWE received millions in public funds to subsidize its website development and television programming without having to increase their spending in any way. One year, when taxpayers dropped over $120 million in film tax credits, McMahon’s company received multi-million dollar tax credits for four of its ongoing operations.
Oh, and one last point. One of the major problems is that, in general, the state does not report who benefits from tax credit programs so it is impossible for the policy makers, the media or the public to even determine whether they are being fleeced.
A bill was introduced this past Legislative that would have required greater transparency when it comes to Connecticut’s tax credit programs. After heaving lobbying by the Malloy Administration the bill was pulled from consideration. Their argument? It would hurt business.
In summary, it’s great to see discussions are ongoing about the need to bring fairness to our income tax structure at the federal and state level.
A similar discussion is needed when it comes to our business tax system as well.
Politicians say they want to help middle-income families and small businesses. If they are serious they should be doing more to reform and bring fairness to our tax structure – in Washington and here at home in Connecticut.