Topic:
ECONOMIC DEVELOPMENT; ENTERPRISE ZONES; GRANTS; MUNICIPALITIES; TAX EXEMPTIONS; BUSINESS (GENERAL); ECONOMIC AND COMMUNITY DEVELOPMENT DEPARTMENT; TAX CREDITS;
Location:
ENTERPRISE ZONES;

OLR Research Report


August 27, 2007

 

2007-R-0446

TYPES OF BUSINESS INCENTIVE ZONES

By: John Rappa, Principal Analyst

You asked for a description of the different types of business incentive zones and a list of the towns where they are located. You also asked: (1) how the enterprise zone program is administered, the type of data that is collected about the zones, and how the data is verified; (2) how companies receiving the program's incentives are counted; and (3) whether the statutorily required evaluation standards have been adopted.

SUMMARY

The law authorizes nine types of business incentive zones, each based on very narrow statutory criteria. It explicitly authorizes 15 enterprise zones, all of which have been designated. It also authorizes the designation of additional zones under narrow criteria, and two have been designated. The law allows five types of related zones in or near the towns with enterprise zones. The criteria governing the other zones also tend to limit their number. For example, defense plant zones can only be designated in towns hurt by major defense cuts.

The zones offer generally the same types of incentives—property tax exemptions and corporation business tax credits. In most cases, a business must improve property and create new jobs. The incentives in most of the zones are geared mainly toward manufacturers and other businesses that do most of their business out of the state. By law, the towns with enterprise zones are eligible for additional incentives, such as increased funding for municipal and business development projects under the Manufacturing Assistance Act program.

The enterprise zone program is jointly administered by the state and the participating towns. Both market and promote the program. The Department of Economic and Community Development (DECD) certifies whether a business is eligible for the property tax exemptions and the corporation business tax credits, and local tax assessors process the exemption. Towns apply to the Office of Policy and Management (OPM) for grants covering a portion of the subsequent revenue loss. Businesses claim the corporate business tax credits when they file their tax returns with the Department of Revenue Services (DRS).

It appears that DECD adopted the statutorily required standards for evaluating the zones. The standards are: the square footage of improved property, the number of jobs created, and the number of companies certified for incentives. They reflect the purpose of the incentives and the process for providing them: improving property, creating jobs, and attracting businesses to the zones.

These standards dictate the type of data DECD collects. Consequently, DECD tracks the number of certificates issued, the total square footage of the improved property, and the number of jobs created by town. DECD verifies the square footage when it issues the eligibility certificate, and DRS verifies the number of jobs created when a business claims the corporate business tax credit.

ECONOMIC DEVELOPMENT ZONES

Zone Types

We divided the nine types of economic development zones into four groups: enterprise zones, zones allowed only in towns with enterprise zones, zones allowed only in towns bordering a town with an enterprise zone, and zones allowed in any town meeting statutory criteria.

Table 1 describes the criteria for enterprise zones. The legislature initially authorized six zones and subsequently increased the number to 10 in 1986 and 15 in 1993. Each time it did so, it modified the designation criteria. The legislature also adopted narrow criteria under which the DECD commissioner could designate zones in addition to the 15 explicitly authorized ones. Two zones have been added this way.

Table 1: Enterprise Zones

Zone Type

Town Eligibility Criteria

Zone Designation Criteria

Towns with

Zones

Statutorily Authorized Enterprise Zones Designated between 1981-1993 (CGS 32-70)

PA 81-445 authorized six zones

Three in towns with more than 80,000 people

Three in towns with fewer than 80,000 people

PA 86-258 authorized four additional zones in state-designated distressed municipalities, three of which must have fewer than 80,000 people

Criteria for zones designated between 1981-1993 (10 zones)

Size

One or two contiguous census tracts partially zoned for commercial and industrial activity

Demographic

Option 1: At least:

25% of tracts' population have incomes below poverty,

25% of that population receives public assistance, or

or 25% of the tracts' labor force is unemployed

Option 2:

One tract meets the above criteria

These criteria are reduced to 15% for one of the two tracts if the commissioner determines a that significant number of jobs can be created in that tract (i.e., reduced criteria)

Bridgeport

Bristol

East Hartford

Groton

Hartford

Meriden

Middletown

New Britain

New Haven

New London

Norwalk

Norwich

Stamford

Waterbury

Windham

Statutorily Authorized Enterprise Zones Designated after 1993 (CGS 32-70)

PA 93-331 authorized zones:

two zones in towns with fewer than 80,000 people that experienced a major military base or plant closure and

three zones in towns experiencing the largest increase in:

unemployment rate,

number and percentage of school children receiving free and reduced price lunches,

public assistance caseloads, and

percent of unused industrial and commercial space

one of these towns must have more than 80,000 people

For the two zones designated because of base or plant closure, the town can designate the area where the base or plant closed or another area meeting the above criteria.

The zones in the other three towns must also meet the above criteria

Zones Designated at the Commissioner's Discretion under Narrow Statutory Criteria (CGS 32-70 (b))

Under PA 86-258, towns contiguous to the 15 towns with statutorily authorized zones

Under PA 95-64, a town experiencing a major plant closing qualifies for a zone if the company previously closed a plant in another town whose enterprise zone was approved for that reason under PA 93-331

Under PA 86-258, the area bordering the statutorily approved zone must meet the reduced criteria under Option 2 above.

Under PA 95-64, the zone designation criteria are the same as those for the town with the statutorily authorized zone

Hamden (under PA 86-258)

Southington (under PA 95-64)

Having an enterprise zone or bordering a town that has one affects whether a town can have most of the other types of zones. Towns with an enterprise zone can designate entertainment districts and railroad depot zones. They can also extend the zone's benefits to manufacturing plants outside of the zone. A town bordering an enterprise zone town can, under very narrow criteria, designate a manufacturing plant for enterprise zone benefits.

Table 2 describes the other types of zones the law allows only in towns with enterprise zones.

Table 2: Other Zones Allowed only in Towns with Enterprise Zones

Zone Type

Zone Designation Criteria

Towns with Zones

Entertainment District (CGS 32-76)

No limit on district size or criteria for designating geographic areas (eligible entertainment businesses qualify for district benefits regardless of whether they are located in the district)

Bridgeport

New Britain

Stamford

Windham

Railroad Depot Zones (CGS 32-75a)

Abandoned or underutilized railroad depot located outside of enterprise zone

East Hartford

Hamden

Norwich

Qualified Manufacturing Plant (CGS 32-75c (b))

Vacant or underutilized manufacturing plant

Located outside the zone

Minimum 500,000 square feet

Bristol

New Britain

Table 3 describes the zones that are allowed only in towns that border an enterprise zone in another town. As the table shows, the criteria for designating these zones are also very narrow.

Table 3: Zones Allowed only in Towns Adjacent to Towns with Enterprise Zones

Zone Type

Zone Designation Criteria

Towns with Zones

Qualified Manufacturing Plant (CGS 32-75c (a))

Town must have fewer than 20,000 people

Manufacturing facility must have at least 180,000 square feet and be located in a census tract that

is contiguous to the zone and a census tract containing a low- and moderate-income housing project in the town with the zone

includes at least 100 acres of vacant land zoned for industrial, commercial, or other significant economic uses

is bounded in part by a railroad track and a stream

Bloomfield

Contiguous Municipality Zone (CGS 32-70 (b) (3))

Any census tracts adjacent to the enterprise zone in the other town (tracts do not have to meet statutory size and distress criteria)

Legislative body of the enterprise zone town must approve the designation

Plainville

Towns do not have to have enterprise zones or border a zone with a zone to have a defense plant, enterprise corridor, or housing development zone. But, as Table 4 shows, the criteria for designating these zones are very narrow. For example, only two or more contiguous towns each meeting very specific population, economic, and geographic criteria can designate a corridor zone.

Table 4: Zones Allowed in any Town Meeting Statutory Criteria

Zone Type

Town Eligibility Criteria

Zone Designation Criteria

Towns with

Zones

Defense Plant Zone (CGS 32-56)

Defense cuts:

resulted in cancellations in prime contracts and subcontracts,

caused or will cause the loss of employment opportunities in the town, and

do or will severely impact the town

Property occupied by a business facility severely affected by defense cuts

Stratford

Housing Development Zones (CGS 8-376)

State-designated distressed municipality (25 towns)

Up to one or two contiguous census tracts

25% of the area is zoned for multifamily housing

No towns

Enterprise Corridor Zones (CGS 32-80)

Two or more contiguous towns, each of which:

is a state designated public investment community (42 towns) and a distressed municipality (25 towns),

has fewer than 40,001 people;

has an average unemployment rate that exceeds the state's average as reported by the labor commissioner on the preceding July 1 for the most recent 12-month period; and

has an average per capita income less than the state average's, according to the last census or the U.S. Census Bureau's population report for the preceding January 1, whichever is most recent

at least one of the towns is located along an interstate highway, a limited access state highway, or intersecting interstate or limited access state highway; and

at least one of the towns must have been designated as a regional center on the State Plan of Conservation and Development's locational guide map

Zone covers each entire town

Route 8 Zone:

Ansonia

Beacon Falls

Derby

Naugatuck

Seymour

Interstate 395 Zone:

Griswold

Killingly

Lisbon

Plainfield

Putnam

Sprague

Sterling

Thompson

Northwestern Connecticut:

Torrington

Winchester

Zone Incentives

The law authorizes property and corporate business tax incentive for developing property in the zones. As Table 5 shows, both incentives are available in all of the zones except housing development zones (HDZs), where residential and commercial property owners qualify only for property tax exemptions. (No HDZs have been designated). Manufacturers and specified service firms qualify for incentives in most of the zones except the entertainment districts, which are geared toward a wide range of entertainment and entertainment-related businesses.

Table 5: Zone Incentives

Affected Zones

Benefit Package

Eligible Businesses

Enterprise Zones

Enterprise Corridor Zones

Railroad Depot Zones

Qualified Manufacturing Plants

Contiguous Municipality Zone

Entertainment Districts

For Facility Improvements:

Five-year, state reimbursed property tax exemption for facility improvements and machinery and equipment purchases (CGS 12-81(59) & (60))

10-year, 25% corporate business tax credit attributed to facility improvements (credit increases to 50% if business meets specified job creation goals (CGS 12-217e)

For starting a new business:

10-year corporate business tax credit for new companies locating in the zones:

100% for first three years

70% of next seven years (CGS 12-217v)

For commercial and residential real property improvements:

7-year exemption on the value of improvements:

100% in first two years

50% in the third

Decrease by 10% in each of the remaining four years (CGS 12-71)

(No state reimbursements for this mandatory exemption)

In all zones except entertainment districts:

Manufacturing

Various financial and business services

Health services

Fishing, hunting, and trapping

Motor freight transportation and warehousing

Transportation

(Other commercial and residential property owners qualify for the 10-year exemption for property improvements)

Entertainment Districts:

Set manufacturers

Sound and video equipment providers and manufacturers

Writers

Talent, music, and producer agents

Entertainment financiers

(Entertainment businesses do not have to be located in the district to qualify for benefits.)

Housing Development Zones

Priority for DECD housing funds

11-year property tax exemption for improving commercial and moderate-income multi-family housing

For-profit and nonprofit housing developers

Commercial and residential property owners

Collateral Benefits of Having an Enterprise Zone

There are collateral benefits to having an enterprise zone. The law designates the 17 towns with these zones “targeted investment communities” (TIC), which qualifies the towns and projects in them for enhanced funding and other tax incentives. Table 6 describes these incentives.

Table 6: TIC Incentives

Program

Description

Eligible Recipients

Manufacturing Assistance Act

Loans covering up to 90% of the costs of large-scale public and private development projects

Business

Nonprofit developers

Towns

Urban Sites Remediation Program

Funds for cleaning up contaminated sites with commercial potential

DECD-selected sites

Community Economic Development Fund

Flexible, low-interest business loans

Start-up and established businesses that cannot afford conventional bank loans

Targeted Investment Community Tax Incentives

Same as the enterprise zone incentives, but businesses must show that they need the incentives to undertake the project

Same as enterprise zones, but the facilities must be located outside of the zones

Urban and Industrial Sites Remediation Program

Corporate business tax credits for investing in new facilities

Businesses

New Facilities Incentives

Property tax exemptions and corporation business tax credits for developing facilities and creating jobs outside the enterprise zones but still in the TIC

Financial service and information technology

ENTERPRISE ZONE PROGRAM

Administration

The enterprise zone program is a hybrid state and local economic development program. The legislature fixed the number of zones and specifies the criteria for designating and approving them. Towns proposed zones based these criteria and the DECD commissioner approved them. Local economic development offices and DECD market and promote the zones both to businesses in the zones that want to improve or expand their facilities and those outside the zones that want to relocate their operations to a new site.

State and local agencies administer the incentives. Manufacturers and financial service firms must apply to DECD for an eligibility certificate that qualifies them for the zone's property tax exemptions and corporation business tax credits. A business must apply to the town's property tax assessor to obtain the exemption. It must do so on a form provided by OPM. It must claim the credits on its corporate business tax return. A copy of the eligibility certificate must accompany both documents.

The state reimburses towns for half of the revenue they forgo because of these exemptions. Towns must apply to OPM on a form it prescribes to receive the reimbursement. This reimbursement does not cover the property tax exemptions towns must grant to residential and commercial property owners in the zones who improved their properties.

Performance Measures and Data Collection

The standards and the data DECD uses to evaluate the enterprise zones' performance reflects the purpose of the enterprise zone incentives, i.e., property tax exemptions and corporate business tax credits for improving property and, in some cases creating jobs. The performance standards are:

1. number of companies certified;

2. number of jobs created; and

3. square footage leased, purchased, expanded, or renovated (Annual Report of Fiscal Years 2005-2006, DECD, February 1, 2007).

The data DECD collects corresponds to these standards. As mentioned above, a business must apply for an eligibility certificate before it can obtain an incentive. Consequently, DECD aggregates the number of eligibility certificates it issued by town and enterprise zone. It counts a business as having received an incentive when it issues the certificate.

In addition, DECD collects data on the size of each improved property, the number of jobs that existed at each property before it was improved, and the number jobs the business expects to have there after it improves the facility. It annually reports these data by newly constructed, leased, and purchased property. DECD verifies building size and existing jobs data when it reviews a business' preliminary and final application for an eligibility certificate. It periodically verifies the number of jobs that were actually created at the improved property when it inspects it. DRS verifies the number of jobs created for those businesses claiming the 50% corporate business tax credit.

The incentives are often referred to as “tax expenditures,” tax dollars the state and towns forgo to encourage new investment and job creation. Consequently, DECD aggregates the grants paid to towns for a portion of the foregone property tax. (Because the state reimburses towns for half of the revenue loss, DECD uses the grant total to extrapolate the total value of the property exemptions, which it includes in its annual report.) DRS aggregates the total value of the corporate tax credits claimed by enterprise zone businesses and includes that total in its annual report.

Beginning July 1, 2011, DECD must compile more detailed and comprehensive data on enterprise zone businesses, including those that did not receive incentives (PA 06-101, codified at CGS 32-70a). It must do this to evaluate the zones' economic impact based on goals the commissioner must establish and revise, if necessary, every five years.

The data include the number of full- and part-time jobs held by zone residents and their average wages and the amounts invested in property improvements. Businesses must provide this data to towns, which must report it to DECD. DECD will begin training officials on how to collect the required data in September 2007, and towns will begin collecting and report the data in 2008.

JR:ts