Connecticut Tax Revolt!

Back in 1991, when Connecticut first introduced an income tax, outraged citizens staged a revolt on the steps of the Capitol Building. Some protestors even spat at Governor Lowell Weicker when he came out to address the mob.

Since that time, however, the citizens of the Nutmeg State appear to have reconciled themselves to the tax. But last week, when the Legislature passed a new state budget that included tax increases, a different group of stakeholders decided to revolt against the government.

Which group did so? Believe it or not, it was a number of the state’s largest and most profitable corporations. Aetna, General Electric, and Travelers, all firms with corporate headquarters in the state, publicly criticized the measure, and the first two firms threatened to move out of Connecticut if the tax increases were voted into law. After a brief delay, the legislators and Governor passed the budget any way.

The most surprising public announcement, though, may have been the one that was made by State House Leader Brendan Sharkey. According to the legislator, GE is “… not paying any taxes (to Connecticut). How much lower can their taxes be … ?”

Huh? Is it possible that General Electric, a profitable global firm with headquarters in Connecticut, is not paying any taxes to the state at all? In response to Sharkey’s comment, a GE spokesperson simply stated that “We don’t disclose taxes paid on a state-by-state basis.”

Nevertheless, the firm has become known for paying extremely low corporate tax rates by taking full advantage of credits, deductions, and other tax reduction opportunities. And Governor Dan Malloy offered further reassurances about the firms’ tax burdens, saying:

“I’ve had conversations with folks at GE over the last few days; I’m sure those will continue. I’ve had discussions with Travelers, I’ve had discussions with the Aetna over the weekend, and will continue to work with those companies about some of their concerns.”

So what does the Governor mean when he says that he will “continue to work” with these firms? Well, the Governor has a track record of granting generous financial benefits to large corporations. Disney’s ESPN sports network, for instance, has received tens of millions of dollars from the state during Malloy’s administration. Cigna and NBC Universal have received similar benefits as well.

In other words, Connecticut’s budget strategy involves maintaining high corporate income tax rates to pay for state expenses, and then negotiating special financial packages to selected employers to ameliorate their tax burdens. Such a strategy may appear to be reasonable at first glance; after all, it delivers tax restitution to the very corporations that currently employ thousands of state residents.

The problem, though, is that this strategy penalizes small and medium sized businesses that do not have the economic heft and political clout to win such government concessions. And future generations of successful companies spring from this entrepreneurial sector of the economy.

On the one hand, by raising taxes on all businesses, and then by striking deals with selected firms, the government of Connecticut might succeed in balancing its budget in the short term. But on the other hand, it might also inadvertently kill off the smaller and more entrepreneurial businesses that represent its long term future.