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OP-ED | Big vs. Small Business Incentives and Testing the ‘Migratory Millionaire’ Hypothesis

by | Jun 3, 2016 8:00am () Comments | Commenting has expired | Share


Last week, the state Bond Commission voted to give $22 million in low-interest loans and other incentives, to Bridgewater Associates, one of the world’s largest hedge funds, whose principal already benefits from the hedge fund loophole to pay a lower effective tax rate than the average Joe or Jane.

Department of Economic and Community Development Commissioner Catherine Smith explains that looking at it so simplistically is misleading.

“We take a very strong financial view of all the transactions we do at DECD and look at the return to the state over a period of time including the returns that come from the forgivable loan in the form of return of principal and interest, and we also look at the people to be hired, and how much they are going to pay in the way of income taxes, and the sales and use taxes the company is paying if they’re making big investments of capital or IT investments. We factor all of those things together to make sure the state taxpayers who are funding this financial agreement get [paid] back in spades — that the return to the state is well in excess of the cost of our capital to entice the company to remain in the state.”

Within the next two to three weeks, DECD will be producing a report amalgamating the results of the 13 First Five companies (so as not to reveal any proprietary information), which will analyze progress to date, expectations for the future, and look at upside/downside projections.

“In the grand scheme of things it’s a relatively small investment and the returns that will come back to the state — and importantly, the return will come back mostly through the general fund — will be very, very helpful to the state in the long run,” Smith said. “It’s a competitive world we live in — we could have lost these companies to other states if we hadn’t had something in place to consider Connecticut and grow here.”

It will be certainly interesting to see the results of the First Five report, especially in light of other data received from the DECD last Friday after the vote approving the money for Bridgewater.

We’d requested the breakdown of economic incentives between big business (more than 100 employees) versus small business (fewer than 100 employees). At first, DECD provided this data in terms of businesses served — 97 percent small business vs 3 percent big businesses. But realizing that didn’t really tell us the full story, we requested data on the dollars funded. When we received those numbers, it turns out that the percentages are quite different — 37 percent of the incentive dollars go to small businesses versus 63 percent to big businesses.

Granted, these figures are only looking at cost, not the revenue side. But in terms of cost, although the cost per retained and new jobs isn’t far off, the cost of creating a new job at a big business is almost double that of creating a job at a smaller business. One could argue that salaries at a big business are higher, which means higher income tax payments, but so, too, are corporate tax avoidance strategies (just look at General Electric), which means lower taxes on that side. There are many moving parts in this equation.

“These findings are consistent with national research which shows that states award a disproportionate share of economic development funds to large companies. The data raise questions regarding the extent to which the state supports small businesses, which make up 97 percent of Connecticut business and employ 49 percent of its workers,” said Derek Thomas, fiscal policy fellow at CT Voices for Children.

We reached out to the Small Business Administration twice for comment and received no response, which led us to recall a passage from the GoodJobsFirst.org report: In Search of a Level Playing Field: What Leaders of Small Business Organizations Think of State Business Incentives.

The report says, “Even if they have critical opinions, many groups reported feeling the need to stay publicly positive in their approach, given the political landscapes they work in. Thus they shy away from activities like advocating against a large package to a specific corporation for fear that they will lose the political allies they do have. Despite this, many admitted that their members feel frustration about subsidies repeatedly going to big business.”

Of Unicorns and Migratory Millionaires

A popular, oft-repeated narrative amongst certain Connecticut politicians, pundits, and think tanks is that we must cut taxes or else millionaires will leave the state. But a very interesting and important study: Millionaire Migration and Taxation of the Elite: Evidence from Administrative Data, was published recently in the American Sociological Review. The study uses restricted IRS data on the tax returns filed by all million-dollar income earners in all U.S. states between 1999 and 2011 to perform comprehensive analyses of how top tax rates affect millionaire migration. It concludes that the “transitory millionaire hypothesis” does contain a grain of truth: namely, millionaires pay more attention to tax rates than the general population. However, in the strong forms pushed by so many in our state, this hypothesis “is a misperception of both elites and the attractiveness of moving to a different state.”

The transitory millionaire hypothesis is very much dependent on the “I built that” mode of thinking, or as the researchers put it: the assumption that “income derives simply from an individual’s own merits and abilities and is unrelated to location or one’s proximity to others.”

More interesting research came out from Policy Matters Ohio that “unicorns” (not the fantastical, mythical horned beasts, but rather those fantastically valued private start-up companies) are clustered in states with higher tax rates, rather than in the states with the lowest or no income taxes.

Why?

“For a variety of reasons, as experts at the Center on Budget and Policy Priorities have noted, cutting taxes is no prescription for economic vitality. In fact, it may stunt growth by reducing investments in education, infrastructure, and public services, undercutting efforts to develop a trained workforce and offer a high quality of life.”

The Millionaire Migration study based on actual tax data found that it’s actually the poor who are most transitory. As the researchers point out, “today migration seems to be not a privilege of riches, but rather a burden of dislocation and a loss of social ties — something that high-income earners can and do avoid.”

Connecticut should make policy based on hard data, not ideology.

Sarah Darer Littman is an award-winning columnist and novelist of books for teens. A former securities analyst, she’s now an adjunct in the MFA program at WCSU, and enjoys helping young people discover the power of finding their voice as an instructor at the Writopia Lab.

DISCLAIMER: The views, opinions, positions, or strategies expressed by the author are theirs alone, and do not necessarily reflect the views, opinions, or positions of CTNewsJunkie.com.

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