Hartford Business Journal

16 Hartford Business Journal • September 16, 2019 • www.HartfordBusiness.com EIP LLC, said the tax break comes with low risk to the state and will be crucial to marketing the project to a data-cen- ter operator in the coming months. The exemption is the second helping hand the state has provided the $1-bil- lion project, following a long-term energy contract awarded last year that will allow EIP to sell electricity from on-site fuel cells at a favorable price. "Without all of the pieces we put together, this [exemption] being the fi- nal piece, this type of project wouldn't be and hasn't been built at the scale we're talking about," Wick said. "We're thankful and appreciative of CI." How it works The Sales & Use Tax Relief program has been around since 1998, when lawmakers gave the then-Connecticut Development Authority the power to grant sales-tax exemptions. Between 1998 and CDA's phasing out by lawmakers in 2012, the former agency granted 74 exemptions worth approxi- mately $139 million, according to CI's data. Since taking over the program, CI has tacked on another 37 exemption deals worth about $148 million. To qualify, a project must be valued at more than $4 million — yielding about $300,000 in sales-tax exemptions — so the program is only for initiatives that involve fairly significant investment. Nearly all of the exemptions over the years have been tied to job retention or creation requirements, said Karin Lawrence, CI's senior vice president of public and specialty finance, who has overseen the program since CDA's days. "The way the transactions are structured is we grant an exemption in exchange for the creation or retention of jobs, and we hold their feet to the fire via strict requirements," Lawrence said. CI requires a letter of credit so the agency can force repayment when a company falls short of its requirements or moves out of state within 10 years. Full or partial clawbacks have oc- curred upwards of 20 times in the program's 21-year history, estimates CI Chief Financial Officer Phil Siuta. For example, Alexion had to repay some of its $4 million exemption when it moved its headquarters to Boston, Lawrence said. Further back, CDA also got to the front of the line during a mortgage lender's bankruptcy case to claw back an ultimately unearned exemption. Lawrence said the data-center project is a bit unusual for the program, as it techni- cally has no job requirements (though EIP estimates it will generate 3,000 direct and indirect positions over 20 years). Factors that helped convince CI to grant the exemption included the sheer size of the investment, its poten- tial to advance the state's technology infrastructure, and the fact that it's projected to generate $245 million in state and local taxes. Observe and report Sales & Use Tax Relief has by most measures drawn less public attention from lawmakers than other incentive programs. It's not that CI is running a covert operation, but the agency doesn't market the program on its website or issue press releases announcing new deals, even sizable ones. CI reports the deals in its loan com- mittee minutes that it publishes online, and provides annual reports to the legislature detailing its active portfolio of exemptions and other incentives, but information on the program is not eas- ily accessible without asking. This story is likely the first time the Sales & Use Tax Relief's lifetime port- folio has been published. CI provided the data within just a few days of HBJ's initial request. "I'll yield to you that it's not pro- moted," Siuta said. "Usually these big companies find their way to it." "We just don't want someone calling every time their company wants to buy a truck," he added. The program has also avoided the spotlight perhaps because it provides tax exemptions, rather than loans or grants that typically add to the state's bonded debt, or tax credits that can impact state revenue projections. The program bestows to for-profit corporations, on a case-by-case basis, the type of tax benefit more broadly enjoyed by nonprofits when they purchase equipment and goods. State lawmakers over the years have also carved out sales-tax exemptions for an array of other purchases, including certain durable medical equipment, prescription drugs, newspapers and manufacturing machinery. In all, the state waves off an estimated $4 billion a year in sales and use taxes, according to the Office of Fiscal Analysis. While exemptions may get less attention, they're no less important to the taxpayer, according to state Comptroller Kevin Lembo. "These are all public resources, whether they are granted or foregone, and deserve the same level of scru- tiny and study," said Lembo, who has pushed lawmakers to require more transparency into incentive programs. Notably, the value of the data center sales-tax exemption is larger than any of the 20 First Five Plus deals ap- proved under the Malloy administra- tion between 2011 and 2018. Lembo views the data center as a promising project that plays "right into Connecticut's strengths." Nonetheless, he said it's at least fair to ask how big of a deal an agency should be allowed to grant without legislative approval. "When a deal of this size is struck, I think it does call into question 'how big is too big?' " he said. Sales & Use Tax Relief has largely evaded evaluation for how effective it is as an economic booster, though that may be changing. At the behest of open-government advocates like Lembo, lawmakers two years ago ordered the Department of Economic and Community Develop- ment to begin reporting and evaluat- ing incentive programs administered by CI and other agencies. Sales & Use Tax Relief, unlike First Five Plus and various loan, grant and tax-credit programs administered by DECD, does not appear to have ever been formally assessed using an eco- nomic-impact model. Such an evalua- tion would determine metrics like the impact on net state revenue and gross domestic product, which would help the state evaluate whether the exemp- tions have been worth it or not. That's led to some scrutiny. State auditors last year said DECD's annual report, now required by lawmakers to evaluate incentive programs outside of its direct purview, had potentially included only partial information on Sales & Use Tax Relief. Missing from the report, auditors said, was an analysis of whether the program was meeting its goals and whether it should be modified or repealed. DECD told auditors it wasn't in a position to report on another agency's program in a timely manner, but said it would incorporate CI's results into its future annual reports, the next of which is slated to publish in the first quarter of 2020. UConn economist Fred Carstensen, who has long been an advocate of evaluating state incentives, said he's convinced the deal CI granted to EIP LLC is a good bet. He's got a stake in the game: He performed an economic analysis of the fuel-cell portion of EIP's data-center project proposal back in 2016. "This builds a major physical asset — a specialized facility essential to what they do," Carstensen said. "You don't want to subsidize jobs as much as you want to subsidize infrastructure." Largest Sales & Tax Relief program deals Exemption amount Project location Date closed EIP $55.2M New Britain NA Pfizer Inc. $30M Groton 12/1/1998 Electric Boat $20M Groton 10/19/2018 RBS Greenwich Capital $9M Stamford 4/26/2006 Charter Communications $8.4M Stamford 2/11/2019 Walgreens $6M Windsor 10/18/2006 Aetna $6M Hartford 4/23/2007 Boehringer $5M Ridgefield 12/18/2003 Boehringer $5M Hartford 8/12/2008 Bridgewater Associates $5M Westport 11/20/2015 FedEx $5M Middletown 10/7/2016 Amazon.com.decd, LLC $5M Stamford 6/18/2018 Hartford Life Inc $4.8M Windsor 7/26/2007 Northland $4M Hartford 5/25/2004 Dollar Tree $4M Hartford 9/4/2012 Alexion Pharmaceuticals $4M New Haven 10/14/2013 Cigna $4M Bloomfield 7/8/2019 Amazon.com $3.9M Windsor 11/21/2013 Electric Boat $3.4M Groton 10/13/2006 NBC Sports Network $3.3M Stamford 7/12/2012 Source: Connecticut Innovations >> Corporate Incentive continued Walgreens' Windsor distribution center benefitted from a state sales-tax exemption deal. PHOTO | HBJ FILE

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