🔒CT’s biggest corporate incentive you’ve never heard of

State government’s corporate-incentive deals have come under scrutiny in recent years, as questions have arisen about whether it’s a proper use of taxpayer money to provide loans, grants or tax breaks to private-sector enterprises.

In fact, Gov. Ned Lamont’s administration is pulling back on his predecessor’s strategy of providing upfront loans or grants to companies, instead offering incentives only after businesses reach certain job or investment benchmarks.

However, some of the largest incentives Connecticut doles out stem from a little-known program that dates back over 20 years and grants multimillion-dollar tax breaks without direct involvement from state lawmakers or the executive branch.

While it lacks the cachet or name recognition of former Gov. Dannel P. Malloy’s hallmark First Five Plus program, or even Small Business Express, the so-called Sales & Use Tax Relief program has put up big numbers, issuing $286 million worth of sales-tax exemptions to 111 companies and projects since 1998.

That’s according to data provided to Hartford Business Journal by Connecticut Innovations (CI), the state’s quasi-public venture investment arm that approves and oversees the exemptions.

The program has been particularly active in the last two years, posting its highest average deal values.

Companies receiving major sales-tax exemptions since the start of 2018 have included: Electric Boat ($20 million) related to its ongoing submarine-building ramp up; and Charter Communications ($8.4 million) and Cigna Corp. ($4 million), related to their respective headquarters expansions or improvements.

More recently, CI approved its largest Sales & Use Tax Relief program deal ever — a $55.2 million exemption on the purchase of computer servers to fill a proposed New Britain data center that’s slated for construction in the coming years.

[Read more: How a $1B data-center project landed in New Britain]

In a recent interview, Mark Wick, a member of the data center’s developer, EIP LLC, said the tax break comes with low risk to the state and will be crucial to marketing the project to a data-center operator in the coming months.

The exemption is the second helping hand the state has provided the $1-billion project, following a long-term energy contract awarded last year that will allow EIP to sell electricity from on-site fuel cells at a favorable price.

“Without all of the pieces we put together, this [exemption] being the final piece, this type of project wouldn’t be and hasn’t been built at the scale we’re talking about,” Wick said. “We’re thankful and appreciative of CI.”

How it works

The Sales & Use Tax Relief program has been around since 1998, when lawmakers gave the then-Connecticut Development Authority the power to grant sales-tax exemptions.

Between 1998 and CDA’s phasing out by lawmakers in 2012, the former agency granted 74 exemptions worth approximately $139 million, according to CI’s data.

Since taking over the program, CI has tacked on another 37 exemption deals worth about $148 million.

To qualify, a project must be valued at more than $4 million — yielding about $300,000 in sales-tax exemptions — so the program is only for initiatives that involve fairly significant investment.

Nearly all of the exemptions over the years have been tied to job retention or creation requirements, said Karin Lawrence, CI’s senior vice president of public and specialty finance, who has overseen the program since CDA’s days.

“The way the transactions are structured is we grant an exemption in exchange for the creation or retention of jobs, and we hold their feet to the fire via strict requirements,” Lawrence said.

CI requires a letter of credit so the agency can force repayment when a company falls short of its requirements or moves out of state within 10 years.

Full or partial clawbacks have occurred upwards of 20 times in the program’s 21-year history, estimates CI Chief Financial Officer Phil Siuta.

For example, Alexion had to repay some of its $4 million exemption when it moved its headquarters to Boston, Lawrence said.

Further back, CDA also got to the front of the line during a mortgage lender’s bankruptcy case to claw back an ultimately unearned exemption.

Lawrence said the data-center project is a bit unusual for the program, as it technically has no job requirements (though EIP estimates it will generate 3,000 direct and indirect positions over 20 years).

Factors that helped convince CI to grant the exemption included the sheer size of the investment, its potential to advance the state’s technology infrastructure, and the fact that it’s projected to generate $245 million in state and local taxes.

Observe and report

Sales & Use Tax Relief has by most measures drawn less public attention from lawmakers than other incentive programs.

It’s not that CI is running a covert operation, but the agency doesn’t market the program on its website or issue press releases announcing new deals, even sizable ones.

CI reports the deals in its loan committee minutes that it publishes online, and provides annual reports to the legislature detailing its active portfolio of exemptions and other incentives, but information on the program is not easily accessible without asking.

This story is likely the first time the Sales & Use Tax Relief’s lifetime portfolio has been published. CI provided the data within just a few days of HBJ’s initial request.

“I’ll yield to you that it’s not promoted,” Siuta said. “Usually these big companies find their way to it.”

“We just don’t want someone calling every time their company wants to buy a truck,” he added.

The program has also avoided the spotlight perhaps because it provides tax exemptions, rather than loans or grants that typically add to the state’s bonded debt, or tax credits that can impact state revenue projections.

The program bestows to for-profit corporations, on a case-by-case basis, the type of tax benefit more broadly enjoyed by nonprofits when they purchase equipment and goods. State lawmakers over the years have also carved out sales-tax exemptions for an array of other purchases, including certain durable medical equipment, prescription drugs, newspapers and manufacturing machinery.

In all, the state waves off an estimated $4 billion a year in sales and use taxes, according to the Office of Fiscal Analysis.

While exemptions may get less attention, they’re no less important to the taxpayer, according to state Comptroller Kevin Lembo.

“These are all public resources, whether they are granted or foregone, and deserve the same level of scrutiny and study,” said Lembo, who has pushed lawmakers to require more transparency into incentive programs.

Notably, the value of the data center sales-tax exemption is larger than any of the 20 First Five Plus deals approved under the Malloy administration between 2011 and 2018.

Lembo views the data center as a promising project that plays “right into Connecticut’s strengths.”

Nonetheless, he said it’s at least fair to ask how big of a deal an agency should be allowed to grant without legislative approval.

“When a deal of this size is struck, I think it does call into question ‘how big is too big?’ ” he said.

Sales & Use Tax Relief has largely evaded evaluation for how effective it is as an economic booster, though that may be changing.

At the behest of open-government advocates like Lembo, lawmakers two years ago ordered the Department of Economic and Community Development to begin reporting and evaluating incentive programs administered by CI and other agencies.

Sales & Use Tax Relief, unlike First Five Plus and various loan, grant and tax-credit programs administered by DECD, does not appear to have ever been formally assessed using an economic-impact model. Such an evaluation would determine metrics like the impact on net state revenue and gross domestic product, which would help the state evaluate whether the exemptions have been worth it or not.

That’s led to some scrutiny. State auditors last year said DECD’s annual report, now required by lawmakers to evaluate incentive programs outside of its direct purview, had potentially included only partial information on Sales & Use Tax Relief.

Missing from the report, auditors said, was an analysis of whether the program was meeting its goals and whether it should be modified or repealed.

DECD told auditors it wasn’t in a position to report on another agency’s program in a timely manner, but said it would incorporate CI’s results into its future annual reports, the next of which is slated to publish in the first quarter of 2020.

UConn economist Fred Carstensen, who has long been an advocate of evaluating state incentives, said he’s convinced the deal CI granted to EIP LLC is a good bet.

He’s got a stake in the game: He performed an economic analysis of the fuel-cell portion of EIP’s data-center project proposal back in 2016.

“This builds a major physical asset — a specialized facility essential to what they do,” Carstensen said. “You don’t want to subsidize jobs as much as you want to subsidize infrastructure.”