We’re heading into a 2020 legislative session that could see a frustrating lack of progress on transportation funding, tax reform, gaming strategy, rational marijuana laws, long-term liabilities and health policy.
Here’s a bright spot: Economic development incentives.
Democrats and Republicans agree Connecticut needs to find a new way to attract and retain companies. That means carrots that are clear, doled out evenly and designed to reward the kind of job-creation Connecticut needs.
It means no more forking over upward of $200 million a year that we borrow with bonding in order to bribe handpicked businesses with custom-tailored packages — grants, loans and tax credit awards worth as much as $40,000 per job and sometimes even more.
“For incentives to be effective, they need to be simple and they need to be transparent,” said David Lehman, commissioner of the state Department of Economic and Community Development.
Lehman has spearheaded a new strategy since last winter. It’s the biggest change in the way the state has done business incentives in 28 years, since the dawn of the modern-day big deals that defined a generation such as Swiss Bank in Stamford, later UBS.
After nine months of gestating, the new baby is finally ready to be born. Here’s how it’s going to look when it’s presented to the General Assembly to what I expect will be a positive reception. It may be too stingy but that’s easy enough to fix down the road.
* An eligible company that creates at least 25 eligible jobs starting at the time of a signed agreement would be reimbursed an amount equal to 25 percent of the state income tax paid by the added employees. These payments would start at the beginning of the third year and extend to year 7, or perhaps two years longer.
That’s a dramatic change from the state’s habit of paying for job creation up front, then having to “claw back” the money if the jobs don’t last a certain amount of time. And the set formula contrasts with the ad-hoc dealmaking that Connecticut and most states conduct.
* To be eligible, jobs would need to rise above a certain pay threshold. The amount is not yet determined. The statewide median for all jobs, just under $60,000, is one level that might make sense.
* Businesses in any of the state’s 72 designated “opportunity zones,” mostly in low-income census tracts in cities, would be eligible for rebates of 50 percent of the added income tax collection.
* Businesses in the following sectors and industries would be eligible: Insurance and financial services; manufacturing, notably aerospace and defense; bioscience; health care; digital media and entertainment; software and other technology; corporate headquarters (yes, that’s an industry in its own right in Connecticut); renewable energy; and distribution facilities.
A narrower focus
The idea, Lehman said, is not to pick winners and losers but to pick industries that are the most productive — meaning they generate high revenue per job and therefore are likely to grow — or businesses that typically bring in revenue from out of Connecticut. That’s what drives any region’s economy.
Retail and restaurants are notably absent from the list because they’re largely subject to what economists call the substitution effect. If Andy’s Restaurant closes, customers will most likely go to Betty’s across the street and the economy won’t feel much pain.
What about all the flexibility the old system gave the governor and economic development officials? This system functions more like an entitlement — you do X, you get Y — but it will give the commissioner more discretion than entitlement programs. For example, a business not on the list of sectors and industries could participate if it’s dynamic, like, say, a hot educational consulting firm.
Why only higher-paying jobs? “We shouldn’t be giving, in my opinion, incentives for folks to bring minimum wage jobs here,” Lehman said.
Lehman has talked broadly about the philosophy behind the plan almost from the time he started in February.
“He’s hit the nail on the head,” said Sen. Len Fasano, R-North Haven, the Senate Republican leader, speaking about the broad ideas, not the specifics. “You’re rewarding good behavior. … He’s been very tough and he’s been fiscally prudent about how he gives money out.”
How it will work
Before we look at the pluses and minuses, let’s go through some numbers.
Say the Acme Widget Co. plans to add 30 jobs in the next couple of years at an average salary of $100,000 each. At the start of the third year, sure enough those jobs are in place. They pay a total of $180,000 in state income taxes at the 6 percent rate. (Actual tax receipts would be less because of averaging of jobs that pay less than $100,000, but let’s keep it simple.)
The state would then pay Acme $45,000 a year in years 3 through 7 as long as those jobs were still in place. That’s $225,000, or $7,500 per job. It could rise to $10,500 per job in this example if the state paid for nine years instead of seven.
That’s not a bad payoff, but it’s far less than many deals we’ve seen. Each one is different and they can be hard to calculate, but $15,000 to $20,000 per job has been typical. And until now, companies often have had to maintain the jobs for five years or even less, not seven or nine years.
What’s more, the overall payments will probably be capped, so that could limit the payouts.
The first concern is whether this will be enough sweetener to shake Connecticut out of the job creation doldrums. In the four years ending Sept. 30, the state’s economy added 28,000 private sector jobs, or about one-half of 1 percent per year — not a great total.
“I do feel pretty strongly that the market has moved,” Lehman said, meaning that states, seeing the futility of paying vast sums per job in an unwinnable competition, have come down off the highs in the last few years.
Ultimately, with all the factors that go into a decision to hire and locate jobs, will a company go to a different state that’s offering $18,000 per job instead of, say, $9,000? “I have a hard time believing that,” Lehman said.
“If we’re successful in doing this, you would not need borrowing,” Lehman said.
Not leading with incentives
We’re moving from a negotiated free-for-all — whatever deals a company can cut under three main state programs — to a specific formula. That’s fine when it works and it’s certainly more fair. I worry that companies are unique and may need some bending of the rules to suit their circumstances.
ESPN, for example, spent $190 million on a new digital studio building and added a few hundred jobs in 2012. The state gave the sports network $10 million for a guarantee it would keep nearly 4,000 jobs in Connecticut. By any measure, that was a great deal by former Gov. Dannel Malloy.
Under this system, ESPN would haul in maybe $2.5 million or less.
As we see in the ESPN example, this proposed system could undervalue construction. Deals in the Malloy era generally came with a jobs figure and an investment figure, how much each company was putting in the ground. Rewarding that — the biggest example being Pratt & Whitney, with its engineering center in East Hartford — helps make sure the company stays put for decades.
Construction is also not in the list of favored sectors and industries. And, a threshold of adding 25 jobs leaves a lot of small businesses out of the gravy train.
Fasano suggested starting strict and thinking about targeted exceptions after that. Lehman pointed out that the state has other incentives, for brownfields, historic districts, the opportunity zones and so forth.
“Leading with incentives is not the way to grow the economy,” Lehman said, repeating the mantra of his boss, Gov. Ned Lamont.
Besides, he said, sustained economic growth is built on three factors: Best-in-class education, good infrastructure and long-term tax certainty. Sweeteners are just that — sweeteners to the main three courses.
Okay, we’ve got one of three so far. We have work to do on those, but at least the incentives plan is likely to win quick approval and if the problems arise, we can fix them.
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