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THE CONNECTICUT ECONOMY
Walking the Walk
Business leaders laud recent state initiatives. But is Hartford pushing all the right buttons?
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Business New Haven
7/12/1999
By: Abigail White
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The question just about everyone was asking this spring was, 'Should the Federal Reserve step in now and slow down the fast-paced economy by raising interest rates, or should they let it cool down on its own?'
The "New Paradigm" economists answered by saying the economy can grow faster - and the jobless rate can go even lower, due to the surge in productivity. These economists were further encouraged by Fed Vice Chairwoman Alice Rivlin predicting that the economy could grow faster than seemed possible even a couple of years ago, and that there were reasons to believe that the U.S. economy is more productive, more competitive and more inflation-resistant than it once was.
However, in mid-June, Fed Chairman Alan Greenspan cautioned that recent increases in productivity, while today a principal factor in suppressing inflation, cannot be expected to continue forever. Then came the news from Wall Street investors that the economies of Japan and Asia had ended their freefalls and were beginning to rebound.
This sent the economists to look not only at what was happening with domestic business and consumer demands (which historically affect inflation rates) to derive their opinions about the current state of the economy, but to also factor in global developments as well.
The moral of the story? There are sometimes less obvious areas of activity that need to be added to a profile of the economy than the positive readings economic indicators may suggest by themselves.
Here in Connecticut, Gov. John G. Rowland signed into law the next biennial state budget on June 18, providing residents with tax cuts, a rebate, school aid and tuition freezes.
The $23.78 billion two-year budget also increases aid to municipalities, poor and racially isolated schools, health care and a proposed riverfront development in Hartford. The budget increases spending more than four percent in each year and cuts taxes $273 million overall.
Starting this month, the sales tax declined to four percent and will sink to two percent on July 1, 2000. In addition, certain home-improvement services will have the sales tax on them eliminated the following year (fiscal year 2001): services such as paving, roofing, siding and exterior sheet-metal work for residential houses, as well as painting, staining and wallpapering.
Connecticut became the first state to provide by law the Managed Compliance Program for handling outstanding sales and use tax. This program creates a partnership between the taxpayer and the state's Department of Revenue Services. Under the initiative the DRS will provide guidance and education in the tax-auditing process undertaken by a business, and in turn itself saves on the number of hours a state auditor would spend on the premises.
Another business tax initiative undertaken with small businesses in mind will pay a "guarantee fee" on obtaining financing guaranteed by the U.S. Small Business Administration. The new tax credit is equal to the amount of the fee the business paid; it can be applied against the state corporate tax.
The last legislative session saw a major bipartisan effort to provide an array of provisions at the state level to support the business climate in Connecticut. The output of this effort was the Industry Cluster Bill for 1999: a continuation of measures introduced last year to enhance cluster-based economic development and improve the state's overall business competitiveness.
This year's bill included an array of financial provisions including an extension of the net operating-loss carryforward period, R&D tax rebates, and exemptions from income and dividend taxes for long-term investments in small companies.
For instance, Debra Pasquale, president of Connecticut United for Research Excellence Inc. (CURE) and spokesperson for the bioscience cluster, explains there is a new credit-for-cash provision: A biotech company, for example, which generates less than $70 million in annual revenues will have the option to exchange research-and-development tax credits for cash at a 35-percent discount. This allows such companies to plow capital back into R&D operations.
"This particular initiative is record-breaking in that it's an innovative exchange program that delivers 65 cents to a company R&D dollar," Pasquale explains, "and will allow an infusion of capital take place to the early stage of development companies at a very, very critical point.
"Additionally," she says, "the state has also extended the net operating-loss carryforward (NOL) to 20 years from five years.
Of the most recent legislative session, Pasquale says, "In conjunction with the preparation of our 1999 annual report we conducted a cost-benefit analysis of the 1999 Cluster Bill, using our data for the bioscience cluster against how the provisions included in the bill apply to the bioscience cluster.
"What the analysis data showed was, given the current growth rate of the bioscience companies (35 percent annually in the aggregate), in ten years the accumulated financial benefit to the state would be about $138 million," Pasquale says. "Return on investment would begin in year one."
The bioscience cluster itself is also working with the state's Office of Policy & Management (OPM) to streamline the time it takes a new company to complete the permitting process by providing access to appropriate permits on its Web site (www.curenet.org) beginning in mid-July.
OPM is also working with the Connecticut Economic Resource Center (CERC) to help biotech firms locate facilities that can be used for lab space. This too will be available on-line with a hotlink to a person who can provide additional information.
"What's appearing on the horizon here in Connecticut is a pooling together of the state agencies, the governor's office as well as community groups such as the Regional Growth Partnership, combined with tremendous amount of leadership coming out of Yale and its Office of Technology Transfer, and a real commitment on the part of the emerging companies," Pasquale says.
"I think that there are a lot of Connecticut businesses that are poised for growth, and there are a lot of enterprises that are really putting their money where their mouth is," adds Jack Dwyer of Sargent Manufacturing Co. in New Haven. "And to see big expansions in companies like [the West Haven-based pharmaceutical division of] Bayer is very encouraging.
"The corporations see two things," Dwyer continues. "A base of intellectual capital available within the region which makes it an attractive place to work and for them to expand and get people. They also see they're increasing production so they're not simply hiring Ph.D.s - they're hiring folks that can man the offices and the manufacturing plants.
"There are a lot of organizations I see out of the side of my eye that are investing with hard dollars and taking up new plant space and land, like Pfizer building a big plant in New London, which would give rise to the fact that there are optimists as part of the manufacturing community," says Dwyer.
Dwyer speaks favorably of any measures taken by the state that encourage businesses to invest in expansion and development - for example, tax credits and initiatives favoring capital investments within a business.
He explains: "When it comes time for a company to make an investment - for example, to buy a million-dollar piece of equipment, do I put it in our factory here in Connecticut, or do I go ahead and bite the bullet and go where I know the operating costs are going to be less, and put it there?
"If [the state] can throw in a tie-breaker by saying, 'Not only are we going to give you tax credits, but we're also going to do some other creative things to help a business invest in itself,' that would help the business climate be more competitive.
"In a lot of ways, that has defined the mindset going on of late," says Dwyer. "Because of the competitive nature of the world global economy today, there isn't a whole lot of time allowed for development. So speed to market requires that you're able to buy something faster, to acquire something that already exists or something that's already ahead in the development process.
"Assa Abloy [Sargent's Swedish parent] has invested heavily in the business and this has led to some wonderful things happening to a very old company in New Haven," Dwyer adds.
"We were acquired by a foreign entity, and it was the best possible thing that could have happened to this corporation. They acquired Sargent, along with some of our other U.S. sister companies, to gain a larger foothold in the United States. What you're really looking for are initiatives that encourage a business that already has roots to sprout those roots deeper."
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