Presentation on theme: "Utilization of Moribund R&D Tax Credits to Spur Recovery REMI 25 th Annual Conference Austin, TX October 4, 2010 Peter Gunther, Sr. Research Fellow Fred."— Presentation transcript:
Utilization of Moribund R&D Tax Credits to Spur Recovery REMI 25 th Annual Conference Austin, TX October 4, 2010 Peter Gunther, Sr. Research Fellow Fred Carstensen, Director Connecticut Center for Economic Analysis, UConn
Moribund R&D ITCs Type Expected Awards in 2009 ($ Mil.) DescriptionEligibilityExclusionsFeatures Investment Fixed Capital60 5% of $ paid or incurred for new fixed capital investments. Recipients must use capital in CT for at least 5 years Land, buildings, and motor vehicles. 5-year carry-forward recapture provision. Electronic Data Processing 25 Machinery and Equipment 2.5 5-10% of machinery and equipment expenditures. Only firms including related firms with less than 800 employees Cannot be taken with fixed capital credit No large firms above 800 employees. Must exceed expenditures in the previous year. Research and Development5 Credit is 1% of R&D expenditures less than $50 MM; plus 2% of R&D expenses from $50 to $100 MM; plus 4% for R&D expenses from $100 to $200 MM; plus 6% for expenses above $200 MM. Firms with in state R&D that qualifies under federal law. Reduced for taxpayers with workforce reductions in excess of defined thresholds and ceilings on amounts that can be claimed. Indefinite carry- forward with special provisions for small businesses. Experimentation1020% of incremental R&D expenditures from previous year. Qualify under federal law. Non-incremental R&D.15-year carry- forward. Refundable at 65% for small businesses.
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. ITCs intended incentive is dissipated with accumulation.
Accumulations Total accumulation of unused Connecticut R&D ITCs exceeds a billion dollars Under current conditions not expected to be usable.
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
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 Connecticuts productivity edge and higher than national incomes
The States Conundrum Need expansionary policies but dwindling tax base
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.
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 industrys 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
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.
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 CCEAs taxation model