🔒DECD Commissioner David Lehman bares CT’s new economic-incentives playbook

It’s no secret that the Lamont administration plans to reform the way state government doles out incentives to private companies looking to add jobs or make significant capital investments in Connecticut. 

Now, the strategy is finally taking shape.

In a recent interview with Hartford Business Journal, Department of Economic and Community Development (DECD) Commissioner David Lehman bared the state’s new economic-incentives playbook, which will focus on four key programs, including two new concepts. 

The overall goal is to move toward a performance-based, “earn-as-you-go” system, meaning employers won’t reap state incentives until they create a certain number of jobs or make a certain level of investment.

That will prevent the cash-strapped state from having to clawback funds from companies that fail to live up to their deals. 

It also reverses a policy direction set decades ago and put into overdrive by the Malloy administration, which aggressively ramped up corporate incentives — to the tune of more than $650 million in loans and grants and hundreds of millions more in tax credits — that companies benefited from up front, before they created jobs.

The new strategy will not require the state to borrow money up front to incentivize job growth, Lehman said, although the programs’ annual costs, or what caps might be instituted, haven’t been fully fleshed out.

Gov. Ned Lamont has already significantly scaled back economic aid to private companies, having reduced DECD’s bond funding by 60 percent this year compared 2018, Lehman said.

The agency has done around $60 million in incentive deals so far this year compared to previous years when the average was around $200 million, he said.

“I don’t think we need to have or should have the best or most aggressive job-creation incentives,” Lehman said. “I think we need to have a competitive strategy that works for taxpayers and grows the economy.”

The four major programs the state will now focus on include: 

• A modified Small Business Express program that will no longer offer state loans or grants, but instead morph into a loan guarantee program run by private banks.

• The Grow CT Rebate, which is provided to companies in certain major industries that create at least 25 well-paying jobs.

• And a greater focus on two existing incentive programs: the Urban and Industrial Site Reinvestment Tax Credit and the Sales & Use Tax Relief Program.

Lehman said the new incentive strategy will be as transparent and formulaic as possible and focus more on a specific subset of industries key to the state’s future.

There will be some flexibility if a major deal comes around — like if Amazon is looking for a city or state to add 500 jobs — but don’t expect to see a bunch of one-off incentive packages outside the state’s new toolkit.

The goal is to also incentivize growth, he added, so companies that try to hold the state hostage by threatening to move elsewhere may have less of a chance of winning a tax deal or incentives.

“My personal view on this is that we should not be incentivizing retention,” Lehman said. 

The incentives-strategy overhaul comes as states across the country have ramped up economic assistance to businesses in recent years, hoping to woo new jobs and investment. However, incentives are controversial, as their overall value and costs to states remain a point of contention and debate.  

Tim Bartik, a senior economist for the W.E. Upjohn Institute for Employment Research in Michigan, said paying out incentives only after jobs are created or investments made is a strategy used by many other states, especially those that want to avoid clawing back money if a deal goes sour. 

It also allows governors or mayors to make out politically, he said, because they get the upfront benefit of announcing new jobs, while the next administration typically has to pay out the incentive.

Regardless of the form, Bartik says many state incentives are excessive, and in 75 percent of cases, most jobs would have been created even without government support. 

He argues there are other things states can do to spur job creation that would be more cost effective, like invest in customized job training or other workforce-development programs. 

“A majority of voters really like it when governors and mayors aggressively go after jobs,” Bartik  said. “They don’t understand all the complicated arguments over whether these incentives pay off.”

Here’s a breakdown of the four incentive programs DECD plans to focus on:

Small Business Express

The Small Business Express program was created under the Malloy administration toward the tail end of the Great Recession to make available additional capital at a time when banks had tightened their lending standards.

It provides grants, loans and forgivable loans to small businesses with 100 or fewer employees, ranging from high-tech firms to mom-and-pop shops that promise to add jobs or make some kind of capital investment.

From fiscal 2012 to the end of fiscal 2018, the program doled out $295 million to 1,825 companies, which promised to create 6,944 jobs and retain an existing 19,305 jobs. 

The Malloy administration hailed the program as a success and lawmakers renewed funding for it multiple times, but it wasn’t without controversy.

A number of deals went sour, raising concerns the state was wasting taxpayer dollars. Bankers also criticized the program, arguing state government shouldn’t be in the lending business and that Small Business Express was taking away some of their potential customers.

Connecticut Bankers Association President and CEO Tom Mongellow said bankers urged the Malloy administration to convert the program into a loan-guarantee product akin to the U.S. Small Business Administration, but their pleas went nowhere. 

Lehman, on the other hand, is buying in. He said he wants to move DECD away from being a direct lender. Instead, the agency would work with banks on a loan-guarantee program, where lenders handle the underwriting, due diligence and actual loan, while the state puts aside a pot of money to back bad bets. 

Banks would pay the state a fee for guaranteeing the loans.

“The industry has always been in favor of that type of approach,” said Mongellow, who added that banks will be able to better leverage state dollars because $1 million set aside by taxpayers can support $10 million in private loans. “That is great use of limited state dollars.” 

Lehman said the program’s emphasis would also shift toward woman-owned companies, underserved communities and distressed municipalities. 

“We want to change the way we do small business lending,” Lehman said. “We were doing a lot of direct lending and my fear is that we were doing loans that were competing with banks and offering a better rate [3 percent to 4 percent] so we were cannibalizing their business. Or, we were making loans that banks wouldn’t make and there was this adverse selection.”

The Grow CT Rebate incentive

Another incentive — The Grow CT Rebate — will reward companies in specific industries (finance and insurance, advanced manufacturing, health care, bioscience, technology, and digital media) that create at least 25 jobs paying above-average wages.

The goal, Lehman said, is to move away from providing incentives to any old company and strategically invest in well-paying jobs that support important industry clusters. 

To qualify, a company will need to create at least 25 eligible jobs that pay above a certain threshold, say 110 percent above the median income within a certain town, city or county (the exact pay threshold hasn’t been determined). 

The company would be reimbursed an amount equal to 25 percent of the state income tax paid by the new employees. The benefit would increase to 50 percent of the state income tax paid if a company is located within an Opportunity Zone, Lehman said. 

The payments would start at the beginning of year three and run through year seven, but could be extended two years beyond that.

Bartik, the economist, said that type of incentive “is not huge,” compared to what other states are offering.

Lehman said the program, which will require legislative approval, will be transparent, allowing companies and others to understand who qualifies and how. 

“Every economic developer in every town will know exactly the benefits that are available,” Lehman said. “There will be transparency and simplicity.”

Sales & Use Tax Relief Program

The Sales & Use Tax Relief Program hasn’t received a lot of public attention over the years even though it’s been around for two decades and has issued $286 million worth of sales-tax exemptions to 111 companies and projects. 

Most recently, Connecticut Innovations, the state’s quasi-public venture investor that oversees the program, approved its largest 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.

Lehman said it’s a powerful program because some states don’t charge a sales and use tax on certain equipment, so it allows Connecticut to potentially level the playing field. 

“Just from a competitive standpoint there are times when you want to utilize that, particularly for significant or transformative  investments,” he said. 

To qualify, a project must be valued at more than $4 million, so the program is only for initiatives that involve fairly significant investment.

The program has 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 statewide sales and use tax rate is 6.35 percent, but state lawmakers over the years have carved out exemptions for an array of purchases, including manufacturing machinery.

Lehman said he would like to better define how companies qualify for the program. 

Urban and Industrial Site Reinvestment Tax Credit

WWE made a splash earlier this year when it announced plans to relocate its Stamford global headquarters within the city, leasing 410,000 square feet at 677 Washington Blvd., the former North American home of UBS.

The state also helped facilitate that deal by offering the wrestling entertainment company $8.5 million in Urban and Industrial Site Reinvestment Tax Credits, which is available to projects that add significant new economic activity and jobs at an old industrial site or urban center.

To be eligible, projects have to invest at least $2 million to $50 million or more, depending on the type of development. WWE, for example, plans to invest $160 million and create 275 new full-time jobs over time, DECD said.

The full tax credit is allowable over 10 years, but companies don’t see any benefit until three years after they made their investment. It can be used to defray a number of taxes, including those levied against corporations, insurance companies and healthcare centers.

From fiscal years 2009 to 2018, the state awarded $506.5 million in Urban and Industrial Site Reinvestment Tax Credits, which supported $2.6 billion in projects.