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Utilization of Moribund RD Tax Credits to Spur Recovery

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Utilization of Moribund RD Tax Credits to Spur Recovery

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    1. Utilization of Moribund R&D Tax Credits to Spur Recovery REMI 25th Annual Conference Austin, TX October 4, 2010 Peter Gunther, Sr. Research Fellow Fred Carstensen, Director Connecticut Center for Economic Analysis, UConn

    2. Moribund R&D ITCs Sources: Jennifer Weiner, State Business Tax Incentives Examining Evidence of their Effectiveness, Federal Reserve Bank of Boston, Office of Fiscal Analysis, the Connecticut General Assembly The Connecticut Tax Expenditure Report 2009.Sources: Jennifer Weiner, State Business Tax Incentives Examining Evidence of their Effectiveness, Federal Reserve Bank of Boston, Office of Fiscal Analysis, the Connecticut General Assembly The Connecticut Tax Expenditure Report 2009.

    3. Impacts on Usage/Accumulation Except for small research and experimentation companies, start-ups may accumulate R&D ITCs but cannot use them until they become profitable against corporate profit taxes and then only to the extent that they qualify under the maze of constraints noted above that limit their annual use . Companies starting-up large R&D facilities may have larger incremental R&D costs in the state than taxes due and therefore be awarded tax credits in excess of what can be used in that year and then with gradual further expansion for several years lose their capacity to utilize the R&D ITCs they are accumulating. Due to constraints on their use and the barriers against monetizing CT R&D ITCs, additional accumulations become virtually worthless to firms with large accumulations Yield little or no incentive to expand in Connecticut, let alone remain in here. ITC’s intended incentive is dissipated with accumulation. except for research and experimentation by small businesses, start-up companies may accumulate R&D ITCs but cannot use them until they become profitable against corporate profit taxes that would otherwise be payable and then only to the extent that they qualify under the maze of constraints noted above that limit values in their annual use . Companies starting-up large R&D facilities may have larger incremental R&D costs in the state than taxes due and therefore be awarded tax credits in excess of what can be used in that year and then with gradual further expansion for several years lose their capacity to utilize the R&D ITCs they are accumulating. Due to constraints on their use and the barriers against monetizing CT R&D ITCs, additional accumulations become virtually worthless to firms with large accumulations and yield little or no incentive to expand in Connecticut, let alone remain in here. In short, the ITC’s intended incentive is dissipated.except for research and experimentation by small businesses, start-up companies may accumulate R&D ITCs but cannot use them until they become profitable against corporate profit taxes that would otherwise be payable and then only to the extent that they qualify under the maze of constraints noted above that limit values in their annual use . Companies starting-up large R&D facilities may have larger incremental R&D costs in the state than taxes due and therefore be awarded tax credits in excess of what can be used in that year and then with gradual further expansion for several years lose their capacity to utilize the R&D ITCs they are accumulating. Due to constraints on their use and the barriers against monetizing CT R&D ITCs, additional accumulations become virtually worthless to firms with large accumulations and yield little or no incentive to expand in Connecticut, let alone remain in here. In short, the ITC’s intended incentive is dissipated.

    4. Accumulations Total accumulation of unused Connecticut R&D ITCs exceeds a billion dollars Under current conditions not expected to be usable.

    5. Constraints on State development Policies Balanced budget requirements Prolonged recession: Employment 80,000 to 100,000 below capacity Flat construction Declining manufacturing base Overhanging inventory of current and pending foreclosures Aging and discouraged labor force Unemployment concentrated among youth and the disadvantaged Emigration Employment is 5% to 6.25% below capacity Sound familiar?Employment is 5% to 6.25% below capacity Sound familiar?

    6. Staging the Great Reset Avoid attracting declining industries Need to attract new facilities on the frontier of further expansions Need to transform results of R&D into manufacturing and expanding high-end service industries Productivity increases are at the heart of maintaining Connecticut’s productivity edge and higher than national incomes Passing Reference to David Florida’s The Great Reset CT average personal income is 30% above U.S. averagesPassing Reference to David Florida’s The Great Reset CT average personal income is 30% above U.S. averages

    7. The State’s Conundrum Need expansionary policies but dwindling tax base

    8. Modest Proposal Over the next seven years, CT pay out one billion dollars in outstanding R&D ITCs in exchange for a one billion dollar upfront investment in plant and qualified equipment and machinery. Gunther-Carstensen proposalGunther-Carstensen proposal

    9. Essence of Operating Guidelines In exchange for the companies investing a billion dollars over the next two years in manufacturing and advanced services in Connecticut and agreeing to increase CT employment by their industry’s E/C ratio relative to their capital expenditures, the state would repatriate their R&D ITCs in equal amounts over five full years from the commencement of production at each new facility. Companies would be allowed to trade R&D ITCs among each other and to pool accumulated credits to undertake innovative joint ventures and/or projects

    10. Essence of the Results New economic activity from these investments generates significant additional new tax revenues; Revenues the government would not receive without these investments. Incremental revenues are sufficient to make the payments to repatriate a billion $ in outstanding R&D Investment Tax credits Adopting this policy creates no burden on Connecticut taxpayers, while the companies are able to access their R&D ITCs, tax credits they earned in good faith Partially restore faith in R&D ITC Incentives.

    11. REMI: Modeling Identify participating industries with investment shares roughly dependent on R&D ITC accumulations Geographically allocate investments by county of current location Investment allocations between plant and equipment reflective of industry trends Estimate E/C ratios during operations reflective of the above investment allocations REMI supplemented by the CCEA’s taxation model

    12. Investment Allocations (Millions $)   Pharmaceutical (33%) High-Tech (33%) Biotechnologies (16.67%) Insurance (16.7%) Pharmaceutical (33%) High-Tech (33%) Biotechnologies (16.67%) Insurance (16.7%)

    13. Plant Construction Allocations (Millions $)   The analysis further allocates Investments over time, with construction, including planning and site preparation, occurring in 2010 (25%) and 2011 (75%)The analysis further allocates Investments over time, with construction, including planning and site preparation, occurring in 2010 (25%) and 2011 (75%)

    14. Equipment Allocations (Millions $)   The numbers above are reflective of national allocations by each of the investing industries and the share of each in the total billion dollar investment. M&E is installed during 2011 (40%) and 2012 (60%). the analysis assumes on average completion by mid-2012.The numbers above are reflective of national allocations by each of the investing industries and the share of each in the total billion dollar investment. M&E is installed during 2011 (40%) and 2012 (60%). the analysis assumes on average completion by mid-2012.

    15. Avoids Usual Hiatus from End of Construction to Start-Up Multiple projects with different construction schedules Assumes construction starts in mid to end of 2010 On average completion by mid-2012.

    16. REMI CT Construction Shock (Millions 2000 $) These were allocated among counties in line with earlier discussions.These were allocated among counties in line with earlier discussions.

    17. Initial REMI CT Operations Shock (Direct Jobs) These were allocated among counties in line with earlier discussions. The 2013 shock was sustained over time but with minor adjustments for ongoing industry productivity changes.These were allocated among counties in line with earlier discussions. The 2013 shock was sustained over time but with minor adjustments for ongoing industry productivity changes.

    18. Income Results (Billions 2000 $) Notice that RGDP impacts in Billions for fixed 2000 dollars outpaces growth in personal disposable income. This suggests considerable room for improving the fiscal position of governments. Notice that RGDP impacts in Billions for fixed 2000 dollars outpaces growth in personal disposable income. This suggests considerable room for improving the fiscal position of governments.

    19. Labor Force Results (1,000s of Jobs) The more rapid growth attracts people to Connecticut or retains those who would otherwise have left. There is considerable employment expansion during construction, followed by population adjustments. The population facilitate labor force growth but are insufficient to reverse falling unemployment rates. As note earlier the completion of multiple projects over 2012 avoids the normal difficult adjustment in total employment associated with a single major project. The more rapid growth attracts people to Connecticut or retains those who would otherwise have left. There is considerable employment expansion during construction, followed by population adjustments. The population facilitate labor force growth but are insufficient to reverse falling unemployment rates. As note earlier the completion of multiple projects over 2012 avoids the normal difficult adjustment in total employment associated with a single major project.

    20. State Fiscal Impacts (Millions 2000 $) Under this scheme, the state annual incremental revenues are eroded by additional new expenditures by the state to meet the needs of the larger population. During the first full year of operations and thereafter for four more years, equal payments are made to the companies to repatriate the R&D ITCs at $200 million per year. In this scenario the costs of interest used during construction and the carry charges until the state repatriates the R%D ITCs is bourn by the companies. The end result for the companies is that the repatriation pays out about 67% of their investments costs, inclusive of carry charges. Under this scheme, the state annual incremental revenues are eroded by additional new expenditures by the state to meet the needs of the larger population. During the first full year of operations and thereafter for four more years, equal payments are made to the companies to repatriate the R&D ITCs at $200 million per year. In this scenario the costs of interest used during construction and the carry charges until the state repatriates the R%D ITCs is bourn by the companies. The end result for the companies is that the repatriation pays out about 67% of their investments costs, inclusive of carry charges.

    21. Cumulated State Fiscal Impacts (Millions 2000 $) The cumulated impact on the State’s revenues net of both additional costs and repatriation of the R&D ITCs is given by the brown line. By2017, the impacts exceed one billion dollars by $56.4 million. Whether or not the state is willing to pay any or all of the interest on the investments between 2013 and 2017, is a matter of debate. The lower line indicates the state’s net revenues should it pay all the interest costs. Net benefits to the State would shrink by $456 million should it decide to be that generous. The cumulated impact on the State’s revenues net of both additional costs and repatriation of the R&D ITCs is given by the brown line. By2017, the impacts exceed one billion dollars by $56.4 million. Whether or not the state is willing to pay any or all of the interest on the investments between 2013 and 2017, is a matter of debate. The lower line indicates the state’s net revenues should it pay all the interest costs. Net benefits to the State would shrink by $456 million should it decide to be that generous.

    22. Impediments Inertia Confidence in the State’s capacity to enter into long-term contracts

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