Think of strategic state tax policy as “golden handcuffs.”
Over the last several years, Connecticut has used a series of tax incentives to encourage, enable--and keep--job creators to make huge economic investments here, said Charles Lenore, partner, Day Pitney, who led a Connecticut Business Day tax panel this week.
Such as tax credits that provide companies with incentives to increase capital investment, research and development (R & D), job creation, and investments in urban areas. These are not one-company incentives, but available to any that perform the required activity in Connecticut.
And a tax mechanism called Net Operating Losses that supports the long-term lifecycles of developing and producing products such as biopharmaceuticals, jet engines, submarines, and others so key to Connecticut’s economy.
These “golden handcuffs,” said Lenore, have produced billions in economy-boosting investments, tens of thousands of jobs, and millions in state tax revenue over the past several years.
They’re handcuffs because the incentives cannot be used by anyone other than Connecticut companies and only for activities completed here in the state.
But what if lawmakers tinker with that gold, as the governor has proposed in his budget?
Big and small
Joining Lenore on the panel were representatives from Boehringer Ingelheim, Electric Boat, Achillion Pharmaceuticals, and Prime Technology.
Each had good reasons why lawmakers, in crafting a new two-year state budget, shouldn’t touch the golden handcuffs—especially their immense multiplier effect on Connecticut’s economy.
Beyond the major employers and their huge workforces, literally thousands of small and midsize companies, with tens of thousands of jobs, are supporting and providing vital products and services to their much bigger partners.
It takes those big-small partnerships, plus huge, long-term investments, to design, research, develop, and produce jet engines, medicines, nuclear submarines and other advanced products.
So, like most other states and foreign countries, Connecticut offers “golden handcuffs”--incentives to keep those activities here in the state.
The challenge facing Connecticut is that no matter what, all of that economic activity is going to happen somewhere, but the companies can choose where.
“We can do R&D most anywhere else in the world,” said one panelist. “But where is the cost going to be least so that we can do more?’”
“Research and development is the cornerstone of BI, and will be the major growth driver into the future,” said Dr. Jeff Song, senior associate director at Boehringer.
The company has three major R&D centers in the world, including one right here in Connecticut. Boehringer just added two buildings to its Ridgefield research campus that represent $100 million in new capital investment in Connecticut.
The company employs 2,500 people in Connecticut and works with nearly 3,000 direct service providers across 150 towns in the state.
R&D for new drugs often takes a decade or more, from discovery to marketable medication. Consistent tax policies provide the stability needed to sustain the company’s product lifecycle.
But changes in state tax policy, said Song, “would directly impact our ability to plan, grow, and invest in Connecticut.”
Bursting at seams
New Haven’s Achillion Pharmaceuticals is just the kind of success story Connecticut’s tax policy should be helping to create.
“We’re bursting out of our seams and eager to grow,” said Mary Kay Fenton, Achillion’s executive vice president and CFO. Founded in the Elm City in 2000, the pharmaceutical company has grown to 70 employees with a target of 125 by 2017.
The company will invest more than $30 million in research and development this year in its treatment for Hepatitis C, a condition that affects 150 million people worldwide. “It’s enormous innovation that comes at considerable cost,” said Fenton.
Connecticut’s net operating loss provision is critically important to Achillion because of the upfront costs they must invest with prospects for success years down the road.
But if Connecticut makes the NOL less effective, said Fenton, it will be hard for Achillion’s long-term planning and investment--and hard to explain to members of its board of directors who come from other, lower-cost states.
Promoting direct investment in Connecticut generates a wide and robust supply chain in Connecticut.
Electric Boat’s engineering and construction facilities make Groton the “submarine capital of the world,” said Hank Teskey, EB’s director of taxes and government relations.
Last year, EB was awarded the largest contract in U.S. Navy history—an $18 billion, 10-ship construction contract.
It has over 3,000 engineers working on the design of nuclear subs as part of a total $6.8 billion design contract. Overall it has more than 8,000 employees in Connecticut in two major facilities—engineering in New London, a shipyard in Groton.
But including its vast supply chain, EB and Sub Base New London account for 31,500 jobs in Connecticut, said Teskey.
When the state adopts tax policy that encourages investment in Connecticut, it also supports those jobs—and the families and communities behind them.
Extend good policy
EB’s network includes Prime Technology in North Branford, the 40-employee, state-of-the-art producer of precision measurement instruments—key components in submarines.
Prime’s chairman and CEO Ray Sterman said that “R&D is our lifeblood. We have to spend a lot for R&D.”
Yet the state right now does not extend the R&D tax credit to smaller and midsize businesses. Sterman, who urged lawmakers to continue to support existing tax policies that encourage investment in Connecticut, also asked that they allow pass-through entities like Prime to be able to access the state tax credits larger companies can.
“Connecticut has to be more competitive,” said Sterman. “Taxes really hurt our ability to grow and add more people.”
Connecticut’s economy depends on supporting the state’s long-term, long-range job creators with strategic tax policy. CBIA urges lawmakers not to weaken the tax policy that has enabled our economy to grow, and extend it where it can help more.