Do Corporate Tax Breaks Work?

Jul 5, 2011

State and local governments collectively give more than $70 billion a year of incentives to lure business and jobs. Connecticut’s latest tax break deal is called First Five – and it aims to create a thousand new jobs in the state. But critics of the program say that once again, the state is focusing too much on big employers and not enough on small business. WNPR’s Harriet Jones reports.

Gene Bartholomew is an HVAC technician. A few years ago he was working as a factory rep for Carrier, a division of United Technologies.

“One person would disappear at a time, once a month or thereabouts, and then one day I got the call, and that was the end of that.”

He was laid off from Carrier. He’s now re-employed as a project manager by a small HVAC business in North Branford. But the experience of being laid off started him thinking about how the state deals with its large employers.

“I find it shocking. And when I started doing some research and I started seeing some numbers -- just looking at the Internet and looking at things that you can find, the numbers are unbelievable.”

He’s talking about the large federal contracts and the state tax breaks that go to corporations like UTC, Pfizer and UBS.

“There’s somewhere around 2 million people working in the state of Connecticut. And UTC for instance, probably only has somewhere in the neighborhood of eight thousand in Connecticut. That’s less than one percent of all the employees in Connecticut. Most of the people in Connecticut work for small businesses, and they get nothing.”

In the early 1990s, the state offered about $3 million in corporate tax breaks. According to the Office of Fiscal Analysis, that figure is now almost $350 million. Although the total figure is documented, Connecticut gets very poor marks for transparency on just which companies benefit. So how do we know if these tax breaks are effective? Catherine Smith is commissioner of the Department of Economic and Community Development.

“We run a very specific program called REMI, which looks at the kinds of jobs that will be created, the scale and pay rate of those jobs, the construction, how many dollars are being put in construction, what kind of construction it is. And the model takes all of those inputs and then determines what they think the impact will be on our state revenue.”

She says that’s the figure that’s used to determine exactly how much the state can give away in an up-front tax break. She’ll be in charge of the new First Five initiative passed by the legislature last month. The program offers a package of incentives at the commissioner’s discretion to the first five corporations to create 200 new jobs in the state.

“There’s nothing wrong with the initiative, but it’s very small scale.”

Professor Fred Carstensen of UConn’s Center for Economic Analysis. He says the state lost 105,000 jobs during the recent recession.

“And when you talk to me about a thousand net new jobs, and how soon are they going to be here – I mean, this is just very small potatoes.”

There’s another factor here too, according to Carstensen:

“We are more dependent than any other state on large employers, and that’s not a healthy environment. Large employers net, nationally, lose jobs. They are not net job creators.”

He says Connecticut needs to honor its tax breaks and work well with its major employers but pay attention to its total employment ecosystem, including small businesses. Jason Hickey runs Hickey and Associates, a firm that helps big companies decide where to place and grow their facilities – what’s called “site selection”. He says tax incentives are only part of the mix.

“It is not a driver of most decisions. Often with site selections what we’ll do is create a matrix for the company and ranking things from one to maybe even 500 or 1,000. And incentives are always in the top ten, but often lower, around eight or nine as the important factor to the ultimate site decision.”

When companies do get tax breaks from the state, it doesn't always mean the jobs they create will stay. In 1994, investment bank UBS moved to Stamford, and became the city’s largest employer, with four thousand workers at its height. In return the state put together an incentive deal worth more than $100 million. But now, UBS may be considering moving most of the jobs it created in Connecticut back to Manhattan. Drug giant Pfizer too, was given approximately $60 million in tax breaks by the state when it moved its global research and development headquarters to New London, but ten years later the headquarters building is sold, and many of those jobs too, are gone. It raises the question of how much commitment large multinational corporations make to the state. Catherine Smith insists that companies like UBS and Pfizer did fulfill their obligations.

“The needs of the companies do shift over time, we certainly understand that that can happen. But the way these deals are constructed for that ten year period is that there is a minimum job requirement that they have to abide by, otherwise there’s clawback provisions to take the money back.”

And she says it’s worth luring big companies into the state, because they in turn create work for small employers. United Technologies, for instance, spends some $5 billion in Connecticut on its supply chain, and creates work for thousands of small companies.

“If you look at some of the large aerospace and defense companies we have here, they’ve helped create and nurture a lot of smaller precision manufacturing companies. And no doubt the same could be true of financial services or insurance based businesses – accountants, lawyers, others grow up around them. There’s absolutely no way you don’t want both in your ecosystem.”

And in the wake of First Five, DECD is also crafting what Smith terms an express package for small to mid-size businesses of grants and incentives for job creation.

For WNPR, I'm Harriet Jones.