Cost of doing business in CT one of highest in nation: study
No. 43, No. 45, No. 45, No. 43, No. 46, No. 43, No. 47, No. 47, No. 47 and No. 43. This series shows Connecticut’s ranking, in each of the past 10 years, in the cost-of-doing business category in CNBC’s Top States for Business study.
So, are businesses’ high expenses partly to blame for Connecticut having fewer jobs today than it did 16 years ago? That’s debatable.
In decisions about hiring and retention, Connecticut-based businesses have to take into account some of the highest tax rates in the country and numerous regulatory costs. But the emergence in recent years of many thriving startups — whose prospects have been boosted by engaged investors and nonprofits — shows that the cost of doing business is not an insurmountable obstacle to building an enterprise in Connecticut.
“There’s all this extra overhead, and it stings,” Liz Ceppos, who owns Cross Culture Kombucha, a Danbury-based startup that makes kombucha tea, said in an interview. “The only response to that is to find ways to lower expenses and boost sales. But we keep moving forward. And we’re still growing.”
Businesses grapple with high costs
In the wake of the disruption unleashed by the COVID-19 pandemic, the cost of doing business in Connecticut was exacerbated by inflation jumping to its highest levels in the past 40 years in the U.S. In the 2023 edition of Top States, Connecticut ranked No. 43 and received a D grade for its cost of doing business.
But the high costs are not a new phenomenon. In a coastal state between Boston and New York City, labor and real estate are generally more expensive than other parts of the country that are less centrally located or less densely populated. There are other pressures as well, such as hefty energy expenditures.
Many businesses also cite the weight of local and state taxes. More than 90 percent of manufacturing leaders said that the cost of doing business was increasing,
driven by high taxes and rising labor costs, according to the 2023 Connecticut Manufacturing Report, which was produced by the Connecticut Business & Industry Association and affiliates CONNSTEP and ReadyCT.
In the 2022 fiscal year, Connecticut’s total local and state tax burden was $12,151 on a per capita basis, the highest in the country, according to a study by the Tax Foundation. In other measures of taxation, however, Connecticut is more competitive. In the 2021 fiscal year, it posted a 4.5 percent total effective business tax rate, which equals local and state tax collections as a percentage of privatesector gross state product, according to a report by professional-services firm EY. The national level was 4.9 percent.
At the same time, many businesses face significant regulatory costs. Cross Culture Kombucha, for instance, pays $300 for an annual license from the state Department of Consumer Protection and $450 for an annual foodservices license from the city of Danbury.
“If our costs were more under control, I know I’d definitely add to my head count because it would help me personally to get a little more support,” said Ceppos, who has two full-time employees and three part-timers. She still plans to hire more part-timers for the summer season.
But the cost outlook for small businesses is not hopeless. As Connecticut’s finances have improved in the past few years — as highlighted by a series of budget surpluses — the state has provided significant tax relief. The state tax cuts enacted since Gov. Ned Lamont took office in 2019 are expected to total about $1.4 billion across the current fiscal year and the next fiscal year, according to the state Office of Policy and Management. Among the cuts, personal-income taxes are projected to be reduced by about $537 million during the current fiscal year and next fiscal year.
“I don’t want more taxes, but I don’t mind more taxpayers,” Lamont, a Democrat, has said in many speeches.
Reducing the tax burden for Connecticut businesses
Republicans have pushed for even larger tax cuts, but some of them acknowledge that the current two-year budget has moved the state’s tax policy in a more businessfriendly direction.
“I’m a big ‘reputation’ guy because I think that’s how businesses make decisions. I think our reputation has been pretty bad, and I think this new budget is going to help,” state Rep. David Rutigliano, R-Trumbull, said in an interview. He is also a partner in SBC Restaurant Group, which owns the Local Kitchen & Beer Bar locations in Branford and Fairfield; the Sitting Duck Tavern locations in Oxford, Stratford and Trumbull; and SBC Restaurant & Beer Bar in Milford.
Rutigliano added that, “once people feel we’re not so hostile, that it’s not so expensive to be here, that they don’t need to look for other opportunities somewhere else — then I think things will get better.”
There are a number of other ways that Connecticut could reduce businesses’ tax burden. For instance, the state legislature could raise the passthrough entity tax credit from its current rate back to its original, higher level. Such a change would save 123,000 small businesses across the state an estimated total of $60 million per year, according to the Connecticut Business & Industry Association. In January, the passthrough entity tax became optional. But the benefits of opting in include a lower federal income tax liability for entities’ individual members.
“If we want to be competitive, we need to restore that tax credit back to the original 93 percent rate,” CBIA CEO and President Chris DiPentima said in an interview. “That would put money $60 million back in the hands of our small businesses, so they can pay higher wages, invest in equipment, training for employees to upskill them and make the investments that help grow an economy.”
At the local level, high property taxes still loom as a worry for many people in Connecticut. While some citiesand towns have pursued mill rate decreases in recent years, a study published last month by the state Department of Revenue Services cited data that, “demonstrates that the majority of the property tax burden is shouldered by (individual tax filers) in lower-income deciles.”
A lower cost of doing business, including reduced taxes, would help make Connecticut more economically competitive. But it would not singlehandedly cure the state’s difficulties with job creation, much of which now stem from labor shortages. Just ask West Virginia, the No. 1 state last year in Top States’ cost-of-doingbusiness category. Besides Connecticut, West Virginia was one of only three other states that had fewer jobs at the end of 2023 than they did in March 2008, which was when Connecticut reached its all-time jobs
In the past 10 years of CNBC’s Top States for Business study, Connecticut has ranked every year in the bottom fifth of states in the cost-of-doing business category. The states in parentheses are, respectively, the top-ranked and bottom-ranked states in the category for the given year.
2013: No. 43 (No. 1: South Dakota; No. 50: California)
2014: No. 47 (No. 1: Oklahoma; No. 50: New York)
2015: No. 47 (No. 1: Indiana; No. 50: Hawaii)
2016: No. 47 (No. 1: Indiana; No. 50: Hawaii)
2017: No. 43 (No. 1: Mississippi; No. 50: Hawaii)
2018: No. 46 (No. 1: Arkansas; No. 50: New Jersey)
2019: No. 43 (No. 1 Kentucky; No. 50: California)
2020: No Top State rankings
2021: No. 45 (No. 1: Oklahoma; No. 50: Hawaii)
2022: No. 45 (No. 1: Missouri; No. 50: Hawaii)
2023: No. 43 (No. 1: West Virginia; No. 50: Hawaii)
Source: CNBC Top States for Business peak. In West Virginia’s case, it is hampered by many other problems, including issues with workforce development.
The Mountain State last year ranked No. 46 overall in Top States. Connecticut placed No. 31 overall, up eight spots from 2022.
‘I realized that this was what I wanted to
do’
Despite their high operating costs, many small businesses are growing in Connecticut. In November 2022, Cross Culture opened a new facility in Danbury that houses its brewery, as well as a taproom and bottle shop.
Cross Culture has expanded its operations with the support of the Women’s Business Development Council, a Stamford-based nonprofit that focuses on helping women-owned businesses across the state. Cross Culture used a $9,000 grant that it received in 2022 from WBDC to buy a keg washer. The apparatus automated a process that was previously done entirely manually.
“With WBDC, they make you feel like you have some leverage,” Ceppos said. “You have somebody on your side to guide you.”
Connecticut also benefits from the presence of many investors who want to invest in startups. Exemplifying the impact of this support is the Milford-based Athletic Brewing Co., a leading manufacturer of non-alcoholic beer that produced more than $90 million in sales in 2023. Boosted by an approximately $2 million investment from Connecticut Innovations, the statechartered venture capital organization, Athletic has become one of the fastestgrowing companies in the U.S., since its founding in 2017. The expansion was highlighted by the opening in 2022 of its current headquarters, which includes an approximately 150,000-square-foot brewery. The company now employs more than 100 people in Connecticut.
“The state was a big
part of the decision to build our current worldwide headquarters,” Athletic co-founder and CEO Bill Shufelt said in a written response. “This facility is capable of producing roughly 50 times more non-alcoholic beer than our original brewery. Connecticut Innovations not only helped us attract early investors, but it has been a participant in helping fund our capital expansion projects. The (state’s) economic development department has been also helpful in steering us towards appropriate tax breaks based on our hiring and contributions to the state economy. Additionally, our team and leaders have become active and proud participants in the state’s manufacturing and labor programs.”
Aligning with a nationwide boom in entrepreneurship since the beginning of the pandemic, startup formation has accelerated in the past few years in Connecticut. Nearly 49,000 businesses that were likely to make hires were registered in the state between March 2020 and December 2023, compared with about 39,000 in the previous four years, according to Census Bureau data.
“COVID is changing a lot of things, and it’s making people re-invent who they are and innovate,” David Lehman, the thencommissioner of the state Department of Economic and Community Development, said during a business-networking event in Stamford in June 2021.
Bridgeport resident Darwin Lara is one of the pandemic-era entrepreneurs. Having previously worked in solar-panel sales, the University of
Bridgeport alumnus decided about four years ago that it was time to pursue full-time his own venture, Evocorp, which provides cybersecurity and managed IT services.
“During that time of crisis in the world, I realized that this was what I wanted to do full-time,” Lara said in an interview.
Today, Lara has a client list that includes Homes for the Brave, a Bridgeport-based nonprofit that provides housing and services to individuals experiencing homelessness, and Amalgamated Transit Union, the largest labor union representing transit and allied workers in the U.S., and Canada.
Part of Evocorp’s mission is to develop homegrown talent. Lara is supported by a part-time technician, Roberto Contreras, who is a senior at the University of Connecticut, where he is majoring in electrical engineering.
“It’s a very hands-on job,” Contreras said in an interview. “This has definitely helped me learn a lot about real-life experiences and problems.”
After Contreras graduates later this year, Lara plans to hire him as a fulltime employee.
“As a business owner, I’m aware of the cost of doing business in Connecticut,” said Lara, who was the recipient of last year’s Rising Star-Entrepreneur of the Year Award from the Bridgeport Regional Business Council. “But I’m really good at cutting costs in certain areas.”
This is the third story in a multi-part series that looks at Connecticut’s economy over the last decade-plus, the challenges the state faces and what is next.