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Report: State Subsidies Costly, Blunt, And Poorly Monitored

by | Oct 25, 2011 5:30am
() Comments | Commenting has expired
Posted to: Business, Labor, Nonprofits, Special Session

Christine Stuart file photo

UBS in Stamford. One of the companies to recently receive million from the state

As the General Assembly prepares to give $291 million to Jackson Laboratory to build a research facility in Farmington, a nonprofit, nonpartisan research center released its own report Monday detailing how few jobs the state created over the years with similar economic incentive packages.

“Connecticut has grown increasingly aggressive in its use of economic development subsidies, also called ‘incentives,’ spending hundreds of millions of dollars per year in foregone revenue to attract business,” two researchers from Good Jobs First concluded. “The number of subsidy programs has grown over the years, while qualifying criteria have been eased multiple times.”

The report, released less than 48 hours before the Wednesday special session on job creation, was commissioned by the Working Families Party, which has been protesting state subsidies the past few weeks.

“As this report shows, we’ve been spending more and more taxpayer money on corporate tax breaks,” Jon Green, executive director of Connecticut Working Families, said. “But those incentives have not generated long-term sustainable job growth. We need to do better.”

Calling it an “inefficient, blunt instrument” to create jobs, Thomas Cafcas and Greg LeRoy, who co-authored the report, said several tax credit programs offered by Connecticut have actually been shown to cause more public job losses than they created private sector jobs.

The analysis also doesn’t bode well for Gov. Dannel P. Malloy’s “First Five” program, which has given large incentive packages to at least three companies since June. Malloy is expect to announce another large incentive package today to get NBC Sports to relocate from New York City.

At best the two researchers said their examination of Connecticut’s program based on information from the Department of Economic and Community Development, showed mixed results. They said just over half of the companies audited in 2010 successfully met their job requirements and those that fell short haven’t been subjected to the clawback provisions of their particular contract with the state.

RBS Securities in Stamford was one of the biggest winners of Connecticut’s assistance program winning $100 million in 2007 in exchange for creating or retaining 1,850 jobs. The company had about 1,685 jobs as of June 30, 2010, but has yet to be audited for compliance. UBS, which is located right next to RBS in Stamford, has received $46 million since 2001. That doesn’t count the $20 million it received from the state in August to keep at least 2,000 people at its Stamford location until 2017. As of August UBS said they had about 3,500 employees in Connecticut, which means it could actually shed about 1,500 jobs and still be in compliance with the state.

Aside from UBS, the DECD’s 2010 data shows companies in its portfolio have agreed to retain an aggregate 36,837 jobs and create 8,194 new jobs, for a total of 45,031 jobs. Collectively these companies have received approximately $442 million in subsidies through loans, tax credits and grants, for a total subsidy per promised job of about $9,800. But there are other subsidy programs which carry a much higher cost.

Top 25 biggest subsidies

The 10 most expensive subsidies carried an average cost of $98,721 per job. The information taken from the 2010 report, but not in an easy to read format, showed Innovative Arc Tubes Corporation received $1.5 million and created 9 jobs at a cost of $166,667 per job. Twenty-two percent of those jobs were part-time. Asterisk Financial Inc, received $1.08 million and created just seven jobs, and Tenergy Christ Water LLC received $3.175 million and created 34 jobs at a total of $93,382 per job. Composite Machining Experts LLC received $270,000 to create four jobs bringing its per job cost to $67,500.

Of the 70 companies that received assistance from DECD, 39 have fulfilled their job creation obligations, while 31 have not.

“The state does not clarify whether companies that failed their job audits underwent clawbacks or contract modifications,” the report found. “The 31 business subsidy contracts that failed to meet contractual job requirements received nearly $86 million in assistance.”

The 39 that did fulfill their obligations exceeded them by 3,832 jobs because they pledged to create 18,119 jobs and retained or created 21,951 jobs.

Diageo, Lowe’s Home Centers, AT&T, Carla’s Pasta, and Innovative Arc Tubes Corp, are just a handful of the companies that failed to meet their obligations under their contracts with the state, but the report found that DECD does not publicly report its use of clawbacks.

“The agency reported penalizing Diageo and FactSet in 2009 and 2007, respectively, for failing to meet job commitments,” the report says. “The type and amount of the penalties is unknown.”

Cafcas and LeRoy say the state also wrongly assumes all the jobs created by the companies exist because of the assistance.

“If a large share of those jobs would have occurred even without subsidies, as economists say they would tend to, the agency is claiming undue credit for a share of the state’s tax revenue,” the two concluded.

Even more confusing for the researchers was the fact that some of the tax credits companies use are claimed in their state income tax returns. The Department of Revenue Services seems to rely on the honor system when applying the credit to their income tax reports, the two researchers say in their report.

“DRS does not publish information about which companies receive subsidizes, the size of the subsidies, or whether these subsidies are actually even creating jobs,” the report concludes.

And while the report doesn’t mention Malloy’s “First Five” program by name it likely would be met with the same criticism as the rest of the tax incentives and subsidies mentioned in the report.

Malloy has already received criticism from some who say those companies that received the incentives already existed in the state and would have invested in their infrastructure without the pricey incentives.

But Malloy has defended the program asking what would have happened if those companies decided to leave the state.

“All in all, let’s put it a different way, how about if we lost all of those?” Malloy asked reporters back in August . “How about if Ticket Network had gone to Rhode Island or Massachusetts or New York? The headquarters from CIGNA had decided to go to one of the states that was courting them? Or ESPN doesn’t make massive additional investments in Connecticut?”

The state plans on giving upwards of $71 million to CIGNA, $25 million to ESPN, and $8 million to TicketNetwork. The packages are a mix of no-interest loans, tax breaks, and job training grants. UBS was not part of the “First Five” program because it was not agreeing to create any new jobs.

Malloy said as he continues the process of courting and evaluating companies for the tax incentives he’s finding the “toolkit” the state has to lure companies to the state “inadequate” compared to other states.

He’s hoping the bill negotiated between his administration and both Democratic and Republican lawmakers will help improve the state’s offerings.

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Comments

(4) Archived Comments

posted by: CitizenCT | October 25, 2011  6:18am

Too bad.  I was looking for an objective report on the cost and effect of economic subsidies.  Instead it’s a report trying to justify a predetermined conclusion.  The report was commissioned by a very Working Families Families, a biased group.  Then the executive summary says “In an age of rampant corporate irresponsibility…”.  Just more political propaganda to be ignored.

posted by: Disgruntled | October 25, 2011  8:27am

With something like FIRST FIVE JIVE and all the corporate welfare,you will never get an objective report.With today’s announcement you will get a typical Malloyian tautology,after he gets his face on camera of course.
I either never knew or forgot that RBS received $100M. My guess is that their jobs number is fiction but that is just from observing and knowing that RBS is pretty bad with numbers.
The list speaks for itself. Very little true job creation takes place for the most part and like welfare the “job creators” have forgotten how to live off the dole.
Today,with NBC Sports Connecticut “wins” and a small part of New York “loses” but nothing much will have changed except our debt burden.That,and the trains and roads will be a bit more crowded with folks coming into Stamford from their homes across the border.

posted by: GoatBoyPHD | October 25, 2011  10:22am

GoatBoyPHD

This study is just plain sad. Here’s the methodology

a) The State pays credits for investment in labor saving machines

b) Company purchases machines.

c) Company is still in business and was able to cut labor costs and head count and remain competitive in the international market place.

d) Working Parties then spins the use of machines and technology as bad for labor and public sector job creation.

The Weiner study for example notes the difference between incremental R&D tax credits (spending that wouldn’t occur otherwise)  versus a general credit which acts as a refund to current spending.

Incremental is net positive job creation in nearly all studies including the ones that assume the revenue foregone would come out of public sector job creation rather than tax credits to taxpayers.

The much cited CCEA study has some wonderful conclusions buried in the study. Low general business taxation works. Of the credits, it’s the 80/20 rule on steroids. The top 6 credits of 32 programs creates virtually all the jobs.

Yes, some are cyclical. Incremental investments in equipment and machinery in a recession eventually pay off. Analyzing those credits say, from 2008-2011 for job creation (rather than retention) are not meaningful figures by themselves. Positioning for an economic upswing can’t be determined based on a one year cash for jobs basis.

If anything the Weiner study points out the difficulty in taking different methods and studies and then footnoting a comment here and there. It often leads to a conclusion that differs entirely from the source study.

Tax credits are risky. There’s no guarantee that Jackson Labs will keep its spin-off businesses here in CT should they discover a new line of research of a product that requires a separate facility, budget, and personnel. It’s the commitment to capture that add on business which makes the investment intriguing. One thing Hartford knows, industry clusters like Insurance work. A look at upstate NYs nanotechnology partnerships and production in Albany is such an example. Intel and IBM announced $4.4 bil commitments as the nano cluster there is gaining critical mass.

None of those studies discuss tax credits as overall imitative to capture market share in leading technology. and the authors would tell you that and shame for spinning ti otherwise.

Where’s PETA on all this? No naked women at the Farmington site protesting mutant mice and lab rat torture? Am I the one who will have to make the call?

posted by: NOW What? | October 26, 2011  12:53pm

What this article doesn’t clearly state (at least as far as I can tell) is that the position of the report’s sponsor, “Good Jobs First,” is *not* that such financial and tax incentives shouldn’t be used, but rather that when they *are* used they need to be designed in such a way that corporate recipients are held fully accountable for the intended job-creation *results*.