by A.E. Rodriguez & Brian Kench
Connecticut shivers whenever a Best States for Business ranking is published. Suffering the recurring indignity of either being a bottom-dweller or heading in the wrong direction is one of the hazards of living in Connecticut. Recent reports that rank Connecticut on varying dimensions put our state near the bottom for fiscal health, tax climate, and economic outlook. So, the open question is: What can the next governor do to improve our future economic performance and thereby help increase Connecticut’s ranking to become a best state for business?
Using new developments in machine learning developed by the University of New Haven's Economic Performance Laboratory, we discover that Connecticut policymakers should be working on lowering the estate tax and decreasing the corporate income tax. Doing so would greatly improve Connecticut’s business environment.
A recent Pew Charitable Trust analysis puts Connecticut dead last among all the states in personal income growth. The Mercatus Center’s 2018 State Fiscal Rankings has us at 49th. The Tax Foundation Business Tax Climate Index has us at 47th. We come in 40th place in the These rankings tell us that Connecticut has a lot of room for improvement, but unfortunately they don’t tell us a lot about what the specifics are.
Consider the influential Alec-Laffer Ranking – where we come in 40th in the 2018 edition. Its ordering is based on several attributes that it describes as “choices” available to decision makers. Among these are the top marginal personal income tax rate, the top marginal corporate income tax rate, property tax burden, sales tax burden, and others.
As Figure 1 displays, the Alec-Laffer ranking considers whether or not a state is a right-to-work state as the most important determinant of a state’s economic outlook, followed by whether there is an estate tax levied and the magnitude of the top corporate tax rate. Rankings like this still don’t provide enough information for what exactly policymakers can be doing in their state.
This is because most rankings equally weight each subcategory that goes into the overall rank. This is helpful for state-by-state comparisons, but it is not as helpful for practical application. Little to no explanation is provided as to what drives the Alec-Laffer attribute rankings, for instance. No explanation on how each variable impacts our position in the Alec-Laffer Ranking. No explanation on what we are doing right or wrong.
A paper published last year by Ribeiro, Singh, and Guestrin, three data scientists, introduced what they called Local Interpretable Model-Agnostic Explanations (LIME). In combination with a technique popular in Game Theory called Shapley Value we are able to unpack the particular attributes that determine Connecticut’s position of 40 in the Alec-Laffer Ranking. The results of this machine learning approach for Connecticut are in Figure 2 below.
Figure 2 reveals our being a right-to-work state, the fact that we levy an estate tax, and that we have one of the highest corporate tax rate in the country each contributes negatively to our position in the Alec-Laffer Ranking – as do the others shown in the list in decreasing intensity. The influence of the variables that impact our ranking is almost exactly opposite for the state of Florida, as shown in figure 3. Florida is pushed higher in the rankings because it is a right-to-work state, it has a lower top corporate marginal tax rate and so forth.
This illustrates that what might be best for one state, might not be best for another. Using machine learning can help us discern these differences.
What does this mean for Connecticut policymakers? Our result reveals that the policy changes that will yield the biggest bang-for-the-buck are: lowering the estate tax and decreasing the corporate income tax. These changes will help Connecticut become a best state for business as well as improve our future economic performance.
A.E. Rodriguez is Chair of the Department of Economics & Business Analytics in the College of Business, University of New Haven; you can reach him at firstname.lastname@example.org
Brian Kench is Dean of the College of Business of the University of New Haven; you can reach him at email@example.com