New tax credits and job creation programs are key parts of both Democratic and Republican strategy to stimulate the state’s ailing economy, but implementing them won’t be easy.
That’s because adding any new credits or expanding existing ones will force the state to spend money or cede revenue, a complicated tradeoff with Connecticut facing a $515 million deficit this fiscal year and a projected $3 billion deficit over the next two years.
The state’s dire financial situation means lawmakers will have to walk a tight rope when considering new economic development programs, especially ones with a hefty price tag.
Adding new tax credits could mean eliminating or restricting others in order to generate sufficient funds, lawmakers said, a move that will likely draw fire from various industries.
“Like almost everything else in the world, economic development has a cost,” said state Sen. Gary LeBeau, D-East Hartford, who is a co-chair of the commerce committee. “The irony is when we need it the most, we have the least ability to do it.”
LeBeau said Democrat’s top priority is finding ways to invest in all stages of business growth, whether it be through new tax credits or direct investments like state-backed bank loans.
Already, his committee has raised more than a half dozen bills that would provide tax incentives to various industries and economic players that invest here including manufacturers, angel investors and small businesses.
Meanwhile, Republican Gov. M. Jodi Rell has proposed extending the state’s job creation tax credit to businesses with 25 employees or fewer. The program would offer a three-year credit of up to $2,500 per job.
Rell has also pitched a $500 million public-private loan pool for small- and micro-businesses and a green manufacturing sales tax exemption that covers the renewable energy and clean technology industry.
House Republicans are also encouraging some type of job creation tax credit, and both parties have proposed eliminating the state’s $250 business entity tax.
Rep. Cameron Staples, co-chair of the finance committee, said if lawmakers are going to realistically enact new tax credits, they will need to be deficit neutral, and the only likely way to pay for them will be to alter, cap or eliminate existing incentive programs.
Senate Democrats, for example, have publicly discussed redirecting the existing Insurance Reinvestment Fund tax credits — currently worth $200 million — for funds that will invest in emerging technologies, clean technologies and energy innovation.
Staples, a Democrat representing Hamden and New Haven, said his committee will examine all tax credits, but declined to identify which ones could be on the chopping block. Before any decision is made, Staples said, the committee will consult business advocates.
“It’s always difficult because every tax credit was put there for a reason,” Staples said. “But if we think there are better credits for this time, or better ways to provide businesses incentives to grow, than we will look at that.”
Toying with existing tax credits can create a slippery slope for lawmakers. Business lobbyists have warned that uncertainty in the legislative environment is one of the key reasons businesses aren’t hiring. New tax proposals — or threats to eliminate tax credits — create an unpredictable business climate, which keeps employers from investing in their companies, business groups have said.
Last year, for example, when Rell threatened to cap the state’s film tax credit at $30 million, a developer of a $60 million film studio in South Windsor threatened to scrap the project entirely.
Developers and proponents of Connecticut Studios, which has proposed building an eight-stage film studio along Interstate 291, warned that the cap would have killed the project.
After months of intense lobbying and debate, lawmakers agreed not to cap the credits, but did tweak them to ensure that film companies getting the credits spend more of their money in Connecticut.
There was a similar uproar from businesses last year when lawmakers proposed suspending all corporate tax credits for two years and eliminating certain sales tax exemptions, including those on machinery and equipment.
With the state’s tight fiscal situation, it will be paramount for state officials to do a cost analysis of any new tax credit proposal, to ensure that only the ones with the largest economic impact get passed, said Ed Deak, an economist at Fairfield University.
“You have to make sure you get the biggest bang for your taxpayer dollar,” Deak said.
One of Staples’ concerns, however, is the lack of data available to determine the usefulness of the state’s 33 tax credits. He said many credit recipients demand confidentiality and are hesitant to release much information about how they use them, making it difficult to judge their effectiveness.
Staples said there is a proposed bill that would permit the Department of Economic and Community Development (DECD) and Department of Revenue Services, to share information so that they provide a more effective analysis of the credits.
Deak said the most effective tax credits are ones that offer long-term incentives to company’s and stimulate their bottom line. For example, offering companies that make capital investments a rebate on corporate income taxes can be very attractive.
“Those are the kinds of proposals that make it profitable to do business in Connecticut and have a more lasting impact,” Deak said.
Joan McDonald, commissioner of DECD, said any new tax credits must also be structured so that companies have to earn them.
One of the state’s most successful programs, she said, is the Urban & Industrial Site Tax Credit, mainly because companies must show a financial commitment to the state for three years before they are awarded any money.
Since its inception in 2000, DECD has authorized $350 million under the program, which is given to companies that make a capital investment in the state that leads to job creation or retention.
DECD recently used it to lure Starwood Hotels & Resorts Worldwide, which will move its corporate headquarters to Stamford from New York, bringing millions of dollars in investments and 800 jobs to Connecticut.
Starwood will be eligible to receive $75 million in credits, but they won’t see a dime until year four of the project start date.
“That gives certainties to all parities that this is a worthy investment,” McDonald said.
