Topic:
ECONOMIC DEVELOPMENT; EMPLOYMENT (GENERAL); LEGISLATION; LEGISLATIVE INTENT; MUNICIPAL FINANCE; TAX CREDITS; URBAN AFFAIRS (GENERAL);
Location:
MUNICIPAL FINANCE; URBAN DEVELOPMENT;

OLR Research Report


November 26, 2008

 

2008-R-0625

URBAN AND INDUSTRIAL SITES REINVESTMENT PROGRAM

By: Rute Pinho, Research Analyst II

You asked for a legislative history and summary of CGS 32-9t, the Urban and Industrial Sites Reinvestment Program. You also wanted to know (1) how many projects have been approved under the program, (2) how many jobs it has retained or created, and (3) whether the state uses jobs to calculate its return on investment.

SUMMARY

The legislature created the Urban and Industrial Sites Reinvestment Program in 2000 as part of the FY 01 tax package. The program uses corporate business tax credits as a way to stimulate new development in economically distressed towns and the redevelopment of environmentally contaminated sites. It allows businesses to claim up to $100 million in business tax credits for the amounts they invest in projects in designated towns or in redeveloping contaminated properties. The amount of tax credits a business can claim depends on the state tax revenue (and in some cases local tax revenue) the completed facility is projected to generate. The Department of Economic and Community Development (DECD) commissioner estimates the projected revenue and can award credits for up to that amount.

Over the ensuing eight years, the legislature made several revisions to the original program, including extending eligibility for the tax credits to taxpayers making investments through community development entities and lowering the investment threshold for direct investments from $20 million to $5 million and to $2 million for investments in certain mixed-use projects.

To date, the DECD commissioner has approved $172 million in tax credits for five separate projects in four different towns. The credits are based on nearly $600 million in projected development costs, and they represent an estimated 5,735 jobs created or retained by the businesses. While applicants for the tax credits must report on the number of jobs the business will create or retain, the commissioner's decision to award the credits depends solely on tax revenue projections. However, businesses are unlikely to generate substantial amounts of state tax revenue without generating personal income tax revenue from retained or newly created jobs. The approved credits are subject to an annual review to ensure that the project is generating enough revenue to cover the total value of the credits claimed.

LEGISLATIVE HISTORY

Committee Action

The Urban and Industrial Sites Program originated in the Commerce Committee as SB 450. The bill allowed businesses to claim up to $100 million in business tax credits for the amounts they invest, either directly or through a fund manager, in projects in designated towns (urban reinvestment sites) or in redeveloping contaminated properties (industrial reinvestment sites).

The Commerce Committee held a public hearing on the bill on March 2, 2000. Among those who testified in support were representatives from the City of New Haven, the Regional Growth Partnership, Connecticut Light and Power, and the Connecticut Conference of Municipalities. Although witnesses generally supported the bill, several suggested that eligibility be extended to all municipalities and that the investment threshold be lowered to attract investors for smaller-scale projects.

On March 14, 2000, the Commerce Committee favorably reported a revised version of the bill to the Finance, Revenue and Bonding Committee, by a unanimous vote. The Finance Committee revised the bill by, most notably, removing all references to fund managers and lowering the investment threshold for direct investments from $20 million to $15 million. It reported the bill favorably to the Senate on March 27 by a vote of 40 to 3.

The Senate subsequently referred the bill (File 600) to the Appropriations Committee on April 18. Appropriations reported the bill favorably without change by a unanimous vote on April 24.

Senate Debate

The Senate did not act on sSB 450. But it included the language establishing the Urban and Industrial Sites Reinvestment Program in Senate Amendment “A” to SB 523 (File 395), which Senator Looney described as the “tax reduction bill for the year 2000 session, for the fiscal year 2001.” The Senate adopted the bill without discussing the provision establishing this program. The amended bill passed unanimously (PA 00-170).

House Debate

During the House debate on SB 523, Representative Samowitz explained that the urban and industrial site reinvestment tax credits were designed to be “revenue neutral.” That is, in order to qualify for the program, entities would have to demonstrate that tax credits would not cost the state any money. Samowitz also noted that the credits were designed “not just for the large communities, but for all brownfields throughout the state” (House Transcripts, May 3, 2000). The bill passed the House by a vote of 141 to 7.

Program Revisions

In 2001, the legislature made several changes to the program. Among other things, it:

1. extended eligibility for the tax credits to taxpayers investing in urban and industrial site projects through community development entities,

2. required applicants for the credits to project the amount of local tax revenue the proposed project would generate (prior law required them to include only projected state revenue), and

3. permitted urban reinvestment projects to get tax credits without creating jobs (PA 01-09).

In 2003, the legislature increased, under certain circumstances, the maximum investment that a taxpayer could make under the program for a project involving a manufacturing firm in the following industries: pharmaceutical preparations, unclassified food preparation, lubricating oils and greases, and miscellaneous manufacturing industries. The act increased the maximum investment in these cases to the combined state and local revenue produced by the project if the firm is relocating from out of state and the relocation will result in developing at least 725,000 square feet in a state-sponsored industrial park. The legislature also required the tax credit applicant to pay for the costs of all activities performed in the exercise of due diligence in reviewing the project, rather than just the costs of the revenue impact assessment and economic feasibility studies (PA 03-6).

In 2005, the legislature made it easier for businesses to invest in smaller projects. It lowered the threshold for direct investments from $20 million to $5 million and to $2 million for investments in projects that preserve and redevelop historic facilities for mixed uses that include at least four housing units. It qualified businesses that jointly invest in these projects for credits if their combined investment exceeds the applicable threshold. The act also made the credits transferable to more than one taxpayer (PA 05-276).

In 2006, the legislature narrowly expanded the conditions under which projects developing clean, uncontaminated sites qualify for the credits by allowing projects located outside of the state's 31 designated towns to qualify under certain conditions and with a higher investment threshold than the ones the law sets for other projects (PA 06-184 and PA 06-187). The legislature also expressly required the Finance, Revenue, and Bonding Committee to recommend whether to approve or disapprove an urban or industrial site project that would receive more than $20 million in tax credits (PA 06-189).

PROGRAM SUMMARY

The Urban and Industrial Sites Reinvestment Program uses corporate business tax credits to stimulate new development in economically distressed towns and redevelop environmentally contaminated sites. The amount of tax credits a business can claim depends on the projected amount of state tax revenue (and in some cases local tax revenue) the completed facility will generate. The DECD commissioner estimates the projected revenue and can award credits for up to that amount, but no business can receive more than $100 million in credits.

Eligible Investments

Businesses qualify for the tax credits if they invest equity in lend to projects directly, through a state-registered investment fund, or through a community development entity. Businesses investing directly must plan to spend at least $5 million to build new facilities or $2 million for mixed use development that preserves and redevelops historic facilities and includes at least four housing units. Businesses that jointly invest in these projects qualify for credits if their combined investment is above the applicable threshold. Investors qualify for credits if they invest in a facility's construction through a state-registered fund manager whose fund exceeds $60 million in the first year they can claim credits. There is no minimum investment for investments made through a community development entity.

The total value of the credits can equal up to 100% of the amount spent on the facility. But that amount cannot exceed the total amount of state revenue the facility is expected to generate during the 10-year period for claiming the credits. (If the project involves a firm relocating from out of state and the relocation will result in the development of at least 725,000 square feet in a state-sponsored industrial park, the maximum investment for tax credit purposes equals the combined state and local revenue the project produces. This exception is limited to projects involving a manufacturing firm in select industries.)

Project Eligibility Requirements

Site. A business constructing a new facility qualifies for the tax credits based on site and economic criteria. Businesses proposing to develop a site anywhere in an enterprise zone (17 towns), a distressed municipality (25), or a town with more than 100,000 people (five) qualify for credits regardless of the site's condition (31 towns total). With one exception, businesses proposing to develop sites outside of these designated towns qualify only if the land is contaminated and the business will clean it up before it builds the facility. The exception is for a project that (1) the DECD commissioner determines is connected to an operation relocating from another state or (2) involves the expansion of an existing facility requiring a minimum $50 million investment.

Economic Impact. Besides meeting the site criteria, the business qualifies for the credits if the proposed facility meets state and local economic development priorities, is economically viable, will generate significant new economic activity in the town, and will generate direct and indirect economic benefits to the state that exceed the amount invested. The business must show that it needs the credits in order to attract private investment.

Businesses proposing to build in the designated towns must also show that the proposed facility will generate significant additional state and local tax revenues, whereas those proposing to develop in contaminated sites must show that the project will add significant employment in the town and generate additional state tax revenue after it has been remediated to Department of Environmental Protection (DEPs) standards.

Applying for the Credits

Businesses must apply to the DECD commissioner for the credits. In doing so, they must:

1. show that the proposed project meets the site and economic criteria,

2. describe their proposed investment,

3. indicate the project's location,

4. identify the number of jobs the project will create or retain,

5. describe the physical infrastructure that may be created or preserved,

6. provide feasibility studies or business plans,

7. project the amount of state and local revenue the project will generate,

8. provide other information demonstrating the project's financial viability and showing how it will benefit the state's economy and create jobs for residents of the town and the state, and

9. if applicable, show how a remediation project will meet DEP standards.

Commissioner's Role and Discretion

The commissioner is charged with determining (1) whether a proposed facility meets the site and economic impact criteria, (2) how it affects the town, (3) the extent to which it will create new jobs and produce other economic benefits, and (4) whether it conforms to the state Plan of Conservation & Development. She must prepare a (1) revenue impact assessment that estimates the state and local taxes the project will generate and (1) project economic feasibility study. She can use her other powers when approving an application, which can include extending other types of financial assistance, such as grants, loans, and loan guarantees. (But businesses claiming urban site tax credits cannot also claim credits under Enterprise Zone and Connecticut Insurance Reinvestment Fund programs for the same investment.)

For any given project, the commissioner cannot award credits that exceed the lesser of $100 million or the total tax revenue she estimates the facility will generate. (She can award a total of $500 million in tax credits under the program.) She must refer any request for more than $20 million in credits to the Finance, Revenue and Bonding Committee. The committee has 30 days to recommend whether to approve or disapprove the credits, and the legislature then has 30 days to reject or approve it. She can approve the request on her own if the legislature takes no action.

Recapturing Credits. Businesses must repay the credits if the project fails to generate the projected revenue. The commissioner must annually determine the amount of tax revenue the facility will generate and take certain steps if the analysis shows that the project is not generating enough revenue to cover the total value of the credits that were actually claimed. She must require the business to repay the credit and disqualify it from claiming future credits. The law specifies how the commissioner must calculate the repayment and sets conditions under which she can reinstate the credits.

Transferability

A business may sell or otherwise transfer the credit to one or more taxpayers, but the transferees can claim it only during the tax year when the assigning business could have used it. It may only be transferred once.

Claiming the Credits

Businesses and fund managers can begin claiming credits three years after they made the investment. They can claim 10% per year during the next four years and 20% during the last three. They can carry forward for up to five years any credits they could not use during the year in which it claimed them, and continue doing so until they claim the full amount.

Property Tax Benefits

Towns can abate or exempt 50% of the property taxes on urban and industrial site reinvestment projects, if the property does not qualify for property tax benefits under any other law. The tax benefit is for the portion of the property tax due that is attributable to the property's increased value as a result of the remediation, construction, or other improvements. This benefit ends if the owner transfers or sells the property without the town's approval.

URBAN AND INDUSTRIAL SITES INVESTMENT TAX CREDITS: PROJECTS TO DATE

Table 1 lists the projects that have been approved for tax credits under the Urban and Industrial Sites Program. To date, the DECD commissioner has approved $172 million in tax credits for five separate projects in four different towns. The approved credits are based on revenue projections and are subject to an annual review to ensure that the project is generating enough revenue to cover the total value of the credits claimed. The credits are based on nearly $600 million in projected development costs, and they represent an estimated 5,735 jobs created or retained by the businesses.

Table 1: Urban and Industrial Sites Investment Tax Credits Portfolio

Company

Town

Total Development Cost (millions)

Total Auth. Tax Credits (millions)

FY

Jobs Retained

Jobs Created

Total Jobs

Diageo North America, Inc.

Norwalk

$107.1

$40.0

2004

700

300

1,000

FactSet Research Systems, Inc.

Norwalk

36.05

7.0

2005

365

180

545

Lowe's Home Centers, Inc.

Plainfield

80.0

20.0

2005

-

525

525

Eppendorf Manufacturing Co.

Enfield

23.1

5.0

2006

1,700

115

1,815

Greenwich Capital Markets, Inc.

Stamford

345.0

100.0

2007

700

1,150

1,850

Total- All Projects

591.25

172

 

3,465

2,270

5,735

Source: DECD, Annual Report for Fiscal Year 2006-2007

Table 2 shows the estimated credit distribution schedule, based on the projected tax credits.

Table 2: Urban and Industrial Reinvestment Tax Credits: Estimated Credit

Distribution Schedule ($ millions)

Company

Total Auth. Tax Credits ($ millions)

03

04

05

06

07

08

09

10

11

12

13

14

15

16

Diageo North America, Inc.

$40.0

-

-

-

4

4

4

4

8

8

8

       

FactSet Research Systems, Inc.

7.0

 

-

-

-

1

1

1

1

1

1

1

     

Lowe's Home Centers, Inc.

20.0

 

-

-

-

2

2

2

2

4

4

4

     

Eppendorf Manufacturing Co.

5.0

     

-

-

-

-

1

1

1

1

1

1

 

Greenwich Capital Markets, Inc.

100.0

       

-

-

-

10

10

10

10

20

20

20

Total- All Projects

172.0

-

-

-

4

7

7

7

21

24

24

16

21

21

20

Source: DECD, Annual Report for Fiscal Year 2006-2007

Calculating the State's Return on Investment. While applicants for the tax credits must report on the number of jobs to be created or retained by the business, the commissioner's decision to award the credits depends on whether the project will generate sufficient tax revenue to cover the cost of the tax credits. However, businesses are unlikely to generate substantial amounts of state tax revenue without generating personal income tax revenue from newly created jobs. Recipients must prove every year that their project is generating sufficient economic activity to justify the credits or otherwise repay the credits.

As part of its yearly financial review and impact analysis, DECD uses an econometric model to estimate projects' economic impact. Table 3 shows the estimated impact of the five approved tax credit projects. It estimates over $327 million in aggregate net new state revenue and over $72 million in aggregate net new local revenue for the five projects over the 10-year period.

Table 3: Estimated Economic Impact of the Urban and Industrial Sites Investment Program

 

Diageo

FactSet

Lowe's

Eppendorf

GCMI

Total

FISCAL IMPACTS

State:

10 Year

10 Year

10 Year

10 Year

10 Year

 

Aggregate Net New State Revenue

56,228,101

20,781,711

35,401,329

11,007,921

203,890,678

327,309,740

NPV* Net New State Revenue

45,044,614

15,291,048

27,385,102

8,128,342

139,699,273

235,548,379

Average per year Net New State Revenue

5,622,810

2,078,171

3,540,133

1,100,792

20,389,068

32,730,974

Local (Regional):

10 Year

10 Year

10 Year

10 Year

10 Year

 

Aggregate Net New Local Revenue

1,346,557

2,551,757

1,084,866

3,687,069

63,354,674

72,024,923

NPV Net New Local Revenue

1,346,220

2,111,644

838,305

2,765,653

44,201,008

51,262,830

Average per year Net New Local Revenue

134,656

255,176

108,487

368,707

6,335,467

7,202,493

ECONOMIC IMPACTS

Gross Regional Product:

10 Year

10 Year

10 Year

10 Year

10 Year

 

Aggregate

662,719,727

443,069,459

720,993,042

260,544,478

2,625,641,347

4,712,968,053

NPV

510,542,078

335,222,106

537,620,079

186,725,160

1,792,514,475

3,362,623,898

Per Year Average

66,271,973

4,306,946

72,099,304

26,054,448

262,564,135

431,296,806

Employment::

10 Year

10 Year

10 Year

10 Year

10 Year

 

Per Year Average

782

526

710

186

2,307

4,511

* NPV= net present value

Source: DECD, Annual Report for Fiscal Year 2006-2007

RP:ts