How Connecticut becomes the best state for business
What can the next governor do to improve our future economic performance and thereby help increase Connecticut’s ranking to become the best state for business?
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. A recent Pew Charitable Trust analysis, for instance, puts us dead last among all the states in personal income growth. The Economic and Personal Freedom Index puts us at 33rd among the 50 states. The Tax Foundation Business Tax Climate Index – has us at 47th. We come in 40th place in the Alec-Laffer Economic Outlook Ranking.
So, the open question remains: What can the next governor do to improve our future economic performance and thereby help increase Connecticut’s ranking to become the best state for business?
The University of New Haven’s Economic Performance Laboratory, an economics and business analytics department collaboration among its students and faculty, has done the analysis to help us answer the question.
The flaw with each of the rankings data mentioned above is that they do not reveal the policy changes a state could make that yield the greatest bang-for-the-buck. 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 decisionmakers. 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. You can see the full list here.
Upon parsing the rankings to identify most important attributes responsible, we constructed Figure 1, where it is revealed that the most important feature determining a state’s rank is whether it is a right-to-work state, followed by whether there is an estate tax levied and the magnitude of the top corporate tax rate.
Importantly, there is very little offered in the ranking that may be used to help guide Connecticut policymaking. No explanation as to what drives our result. No explanation on how each variable impacts our position in the Alec-Laffer Ranking. No explanation on what we are doing right or wrong.
However, recent advances in machine learning know-how – taught in our Economics and Business Analytics program – allows us to extract this idiosyncratic information to help guide Connecticut policy.
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 examine the particular attributes that determine Connecticut’s position of 40 in the Alec-Laffer Ranking. The results of the LIME and Shapley Value analysis for Connecticut are in Figure 2 below. Figure 3 is a similar result for Florida. We display Florida to provide a contrasting view to Connecticut.
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. 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.
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 the 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 arodriguez@newhaven.edu
Brian Kench is Dean of the College of Business of the University of New Haven; you can reach him at bkench@newhaven.edu