The Economic Power of State Tax Credits

Steven Spielberg used a rundown building in Middlebury to film War of the Worlds, but an innovative Connecticut company transformed the site from the apocalyptic to a state-of-the art R&D facility thanks to positive state tax and economic policy.

Now the sparkling Chemtura Corporation facility is a much better vision of the company’s—and Connecticut’s—future.

Billions in investment dollars, tens of thousands of jobs, and scores of high-tech facilities have stayed right here in Connecticut because of strategic state tax credits used by many in-state businesses.

At a special presentation at the Capitol this week, representatives from Chemtura, Aetna, Boehringer Ingelheim Pharmaceuticals, Electric Boat, Lee Company, United Technologies, AZ Corp., Pricewaterhouse Coopers, and Day Pitney talked about how tax credits are fueling economic growth. [Watch the program on CT-N]

Most important, they said, the tax credits have accomplished exactly what the state aimed to do in creating them—anchoring healthy businesses and industries in Connecticut.

Tax Credits 101

Tax credits can only be earned by companies making an investment in Connecticut jobs or facilities, and only as specified by the General Assembly, said Charlie Lenore, partner, Day Pitney LLP and chair of CBIA’s Tax Council.

Companies also cannot claim a credit until after they make the specified investment, and credits are regularly audited by the state.

Yet there has been some discussion of further curtailing tax credits because of the state’s fiscal situation.

But that would only penalize the very companies in Connecticut that are taking risks and making investments here, said Harry Im, state tax counsel for United Technologies (UTC).

R&D Key to UTC

The state’s research and development tax credit has been–and still is–critically important to maintaining UTC’s R&D vitality in Connecticut, which is considerable.

United Technologies today has six key R&D facilities in Connecticut employing 8,000 engineers. “We have over 4,000 locations in the world,” said Im, “but this little state is our engineering base.”

Keeping it that way means “[making] sure we tie state tax policy to our future, which is innovation.”

Long-Term Value

The R&D tax credit has also helped Boehringer Ingelheim  become another cornerstone of the state’s economy. Of the company’s 9,000 employees in the U.S., 2,500 are located on its Ridgefield campus. And most of the jobs are high-tech, high-paying, and highly desirable, said Dr. James Baxter, senior vice president, development for Boehringer.

Keeping the R&D tax credit is critical to Boehringer’s long-term vision, he added, because it takes at least 10 years for the pharmaceutical company to discover and develop new drugs.

With the help of the tax credit, the company has invested $100 million in a new facility in the Ridgefield/Danbury area that should serve it “for decades to come.”

EDP Credit

Connecticut’s electronic data processing (EDP) tax credit has enabled Aetna to locate and maintain—with an annual investment of about $95 million each year in EDP equipment–its vast data centers in Middletown and Windsor.

The EDP credit reduces the personal property tax burden on Connecticut companies to make it more competitive with neighboring states, said Sandy Coombes, tax director, Aetna Corporate Tax.

And it’s critically important, because at least 12 states—including New York, New Jersey, Pennsylvania, and New Hampshire—do not impose the property tax on EDP equipment. Without the EDP credit, Connecticut would become much less competitive.

Fixed Capital Tax Credit

Westbrook’s The Lee Company “is a true Connecticut success story” in part because of the state’s fixed capital tax credit, said Alex Corl, the company’s chief financial officer.

This credit helps reduce the cost of capital and has allowed Lee to invest more than $39 million in equipment purchases over the last five years—and most important, keep work in Connecticut.

Lee has 1,000 employees globally, with 870 in Connecticut–and most of them highly skilled engineers.

Enterprise Zone Programs

Chemtura’s former War of the Worlds site is just one example of how the company has used the state’s Enterprise Zone programs to stay alive and grow in Connecticut.

The company went bankrupt in 2009 “mainly because we had underinvested in technology and innovation,” said Dalip Puri, vice president, Investor Relations and Treasurer.

But with the help of the Department of Economic Development the company was able to leverage the state’s Enterprise Zone programs to transform its facilities and its future.

Now its high-tech operations are home to more than 400 in-house jobs and also help support additional, “good hard-hat jobs” in the state–because R&D requires continuous upgrading and maintaining as processes and technologies change.

Electric Boat

The Groton/New London area is the “submarine capital of the world,” said Electric Boat’s Hank Teskey, director of taxes, because of positive state tax policy.

Over the past seven years, EB has met and successfully overcome two significant challenges: In 2006, the U.S. Navy deemed that overhaul and repair work would have to be done in public shipyards; and in 2009, the Navy decided to replace its ballistic missile subs.

With the help of various types of state tax credits, EB was able to expand facilities in the New London Enterprise Zone, upgrade its repair docks, and quickly pivot its operations to design and build the next generation of submarines.

As a result, EB has won contracts for 21 submarine repair cases, has 70% utilization of its renovated docks, and in 2012 was awarded a $1.8 billion contract for the initial design of the Ohio Replacement Class subs–all of which also means a significant increase in employees and a huge boost to Connecticut’s economy.

Which, after all, is the best reason for positive tax policy in Connecticut.

For more information, contact CBIA’s Bonnie Stewart at 860.244.1925 or bonnie.stewart@cbia.com.