If you’ve read my columns over the years you know I’ve not been a fan of the state’s economic incentives strategy, which in some years required the government to borrow over $200 million to provide upfront grants to businesses that agreed to add or move jobs to Connecticut.
The policy isn’t sustainable long term, never moved the dial in terms of sparking a major economic resurgence, and also puts government far too deep into the game of choosing winners and losers.
Then, of course, COVID-19 hit and the state and federal support spigot to the private sector blew open. For example, Connecticut companies and nonprofits have received over $8 billion from the federal government’s Paycheck Protection Program. Despite all its flaws, the PPP has been a lifesaver for many small businesses harmed by a pandemic they had no control over. The state’s emergency loan and grant programs were also helpful.
But as we begin to look toward a post-pandemic world, it’s time for Connecticut to end its reliance on private-sector incentives. And the Lamont administration’s newly unveiled earn-as-you-grow tax rebate program is good policy.
Luckily it seems to have bipartisan support. During a recent videoconference roundtable hosted by Lt. Gov. Susan Bysiewicz, top Democratic lawmakers and Connecticut Business & Industry Association CEO Chris DiPentima were all singing kumbaya about the proposed policy.
The so-called JobsCT Tax Rebate Program essentially moves the state toward a performance-based, “earn-as-you-go” system. That means employers won’t reap state incentives — which under the program are tax rebates — until they create a certain number of jobs.
That will prevent the cash-strapped state from having to borrow money to provide upfront incentives to businesses, or claw back funds from companies that fail to live up to their deals.
It is a more sensible policy, but admittedly there are risks. Economic incentives have become big business, as states compete fiercely for jobs and companies.
Let’s not forget the fight for Amazon’s second headquarters, where states, including Connecticut, offered hundreds of millions or even billions of dollars in incentives to lure the e-commerce giant.
Connecticut may become less competitive in the incentives arms race. That will mean the state must compete more on its own merits. And certainly we have many of them, including a well-educated workforce and quality of life that has become more in demand during the pandemic, as New Yorkers have increasingly moved to Connecticut for its suburban lifestyle.
But we also need to recognize our weaknesses, including a high cost of living, high taxes, exorbitant energy costs and a state pension crisis that policymakers have failed to address. If we are going to provide fewer incentives to offset some of those costs, lawmakers must work harder not to exacerbate those pain points — or better yet, improve them.
Breaking down the incentive
You’ll likely need an accountant or lawyer to figure out the new tax rebate program, but here’s an overview.
First, it targets incentives to employers in the state’s top and emerging industries — aerospace and defense, clean energy, life sciences, manufacturing, etc. — that create a minimum of 25 new full-time jobs with salaries above $37,500, or 85% of the median household income of the municipality where the jobs will be located, whichever is greater.
Employers that hit and maintain those benchmarks for at least two years will receive a fully-refundable rebate equal to 25% of the withholding taxes from the new employees over the next five to seven years. The rebate goes to 50% if a company locates or expands in a distressed municipality or Opportunity Zone.
There are also incentives for companies that hire workers at lower wages from disadvantaged backgrounds.
Rebates per job range from $1,000 to $5,000 per year, except for jobs that are created in calendar year 2021, which will have a minimum rebate of $2,000 per employee.
Rebates are capped at $40 million per fiscal year.
Here’s a real-world example of how a company could benefit, according to the Department of Economic and Community Development.
Say you have a company that creates 25 new jobs with an average salary of $60,000.
The withholding tax revenue that would be generated from those jobs over a seven-year period, based on the state’s 5.5% income tax rate, would be $577,500. If those jobs were located in an Opportunity Zone, the employer would get a $206,250 rebate after seven years, or a $125,000 rebate if it was located elsewhere.
That’s real money and a worthwhile incentive to grow jobs in Connecticut. We just need to supplement that with other pro-growth policies — and begin to really address our long-term fiscal issues — to take advantage of a post-pandemic world where the state has new opportunities to really leverage its assets.
