Study says Malloy isn’t bold enough to revive state’s economy

Gov. Dannel P. Malloy’s new budget doesn’t go far enough to accelerate Connecticut’s economic recovery and create better-paying jobs, according to the latest report from the University of Connecticut’s Center for Economic Analysis.

State government needs to invest more heavily in high-technology, cutting-edge projects particularly by overhauling “moribund” research and development tax credits to underwrite major capital projects in advanced manufacturing and research centers.

“Without significant policy change, Connecticut’s growth will come in lower wage jobs,” the study warns. “This is not where the state should be heading.”

While the national economy is showing “signs of modest recovery” fueled by pent-up consumer demand for goods and emerging foreign markets for American exports, layoffs and other contractions in state and local governments nationwide slowed the national recovery during the fourth quarter of 2010.

And proposed spending cuts at the federal level could shave as much as one-third off future growth, the study added.

The national real gross domestic product, the inflation-adjusted market value of all goods and services produced–and a key indicator of a country’s standard of living–should grow 1.35 percent next year, down from 2.18 percent this year.

Connecticut’s real GDP, which contracted by 3.1 percent in 2009 and 1.9 percent last year, can expect “minuscule” growth of 0.26 percent this year and 0.44 percent in 2012, the report states. By the end of next year, Connecticut’s economy will have recovered less than 96 percent of its pre-2009 peak.

“We’ve got to get off the dime right now,” economics Professor Fred V. Carstensen, the center’s director, said Thursday. “We need the jobs now, not in five years.”

Carstensen and his center have been strongly advocating for a new tax incentive program specifically designed for pharmaceutical, biotechnology, other high-tech and insurance companies that have been unable to take full advantage of state credits they have amassed under the current system.

State corporation tax credits usually are capped, limiting how much value can be used in any given tax year. And some companies also amass more in credits than they have in tax liability, further limiting their ability to cash them in.

With the exception of its film tax credit program, the state does not allow companies with unused tax credits to sell them to other firms.

A handful of Connecticut firms collectively have accumulated more than $1 billion in research and development credits, according to the center. “Because companies have accumulated far more credits than they are likely to use to defray state corporate taxes, … credits provide little incentive to accumulate more so that the intended incentive to undertake research and development in Connecticut becomes valueless to these companies,” Carstensen wrote in an earlier report issued in March 2010.

The center has advocated a new approach for the companies in key strategic areas with large amounts of unused credits.

State government should pledge to cover nearly two-thirds of capital costs for new advanced manufacturing or research center projects. But payments would not begin until three years after construction has begun and only if all facilities are completed, staffed and operating, Carstensen said.

The center believes a state commitment to provide $1 billion total over five years in reimbursements for capital costs would be more than offset by the added state income, sales, corporation and other tax revenues generated by these initiatives, Carstensen added.

But Malloy’s budget director, Office of Policy and Management Secretary Benjamin Barnes, said the administration’s prime focus now is on closing a budget deficit that has been projected between $3.2 billion and $3.67 billion for the coming fiscal year. “The most important first step in creating a pro-business environment that promotes job growth is getting out from under the deficit and the questionable financial practices of the state of Connecticut,” he said, adding businesses fear the fiscal instability that has plagued state government in recent years.

Barnes also said the administration would need to see much more detailed economic analysis before it could commit a huge state investment to a very narrow segment of Connecticut’s business community. “Economic development isn’t ‘Field of Dreams,'” he added. “If you build it, they still might not come.”

Barnes’ objection mirrors concerns raised last spring by the legislature’s tax-writing panel.

The Finance, Revenue and Bonding Committee, which studied the center’s tax credit analysis last year, also wasn’t convinced that strategic state investments should be focused on a limited segment of businesses, said former Rep. Cameron C. Staples, D-New Haven, the committee’s House chairman in 2010. “It just wasn’t clear that we should spend $1 billion in such a narrow way.”

But Carstensen said the administration’s priorities, as well as the legislature’s last year, need to be reconsidered.

“The 800-pound gorilla is the economy, not the budget,” he said.”If we don’t recover, if the economy doesn’t get better, we won’t get the revenue and the budget is always going to be in a hole.”

Malloy did take some steps in his budget to beef up the state’s tax incentives for job growth, and the study said those proposals “allow room for some optimism.

Among the governor’s proposals are:

  • The “First Five” program, which focuses tax credits on business developments that commit to creating at least 200 new jobs within two years, or to making a $25 million or greater investment to create at least that many jobs within five years.
  • Raising the cap on tax credits granted through the Urban and Industrial Site Reinvestment Program from $500 million to $700 million.
  • Raising the tax credit cap on the primary Job Creation Tax Credit Program from $11 million to $20 million.
  • And increasing the maximum amount of corporate tax liability that can be erased with job creation credits from 70 percent to 100 percent.