Utilization of Moribund R&D Tax Credits to Spur Recovery

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

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.

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

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

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.

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 $)

13. Plant Construction Allocations (Millions $)

14. Equipment Allocations (Millions $)

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 $)

17. Initial REMI CT Operations Shock (Direct Jobs)

18. Income Results (Billions 2000 $)

19. Labor Force Results (1,000s of Jobs)

20. State Fiscal Impacts (Millions 2000 $)

21. Cumulated State Fiscal Impacts (Millions 2000 $)

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