A number of Connecticut municipalities use tax breaks or incentives to stimulate growth.
Even towns with lower property-tax rates like Windsor resort to tax-fixing agreements, seeking a competitive edge in attracting investment. Deals can give developers/owners a temporary or even permanent lower property-tax rate. Just as important, they offer investors/businesses certainty that their tax bills won’t double or triple from one year to the next.
A recent and notable tax-break deal the city of Hartford hatched in recent years was with one of its most prominent downtown landlords: Shelbourne Global.
“Tax abatements are part of the economic-development toolkit,” said Erik Johnson, the director of development services for the city of Hartford and a former New Haven housing official. “We try to make sure that when we are looking at doing an abatement it’s tied to the reality of not having that new development happen at all. We are in a position as a city that the status quo is not an option. In order to promote growth we are going to have to take some smart risks and make some smart concessions.”
Interestingly, cities and towns each have developed their own strategies and tools for offering tax breaks, but parameters exist.
State law limits municipalities to offering three kinds of optional tax breaks — exemptions, abatements and fixed assessments — but many types of properties and/or developments may qualify for relief, including affordable-housing projects, food manufacturing plants, day cares, amusement parks, urban and industrial reinvestment sites and historical agricultural structures, to name a few.
Tax breaks also exist for personal property, like machinery and equipment.
It’s not clear how many cities or towns use tax deals because it’s not tracked by the state or any other organization.
Courtney Hendricson, a former economic-development official for the towns of Farmington and Enfield, who is now a vice president of municipal services at the Connecticut Economic Resource Center, said she doesn’t think their use is widespread, but communities that do leverage tax deals are seeking a competitive advantage over neighboring towns.
“Towns and cities feel that a tax abatement can give them a leg up on a big development or a big investment,” she said.
Connecticut is not alone in allowing property-tax deals. Every state uses them, according to the Federal Reserve Bank of Boston, and within New England, every state but New Hampshire has a stand-alone property tax abatement program.
Are they worth it?
Tax-incentive deals can be controversial because they do create an unlevel playing field, giving one group of property owners or investors different and preferential tax treatment over others. They can also lead to accusations of political favoritism, especially if deals aren’t done in a transparent manner.
Meantime, there’s not much agreement among academics about whether abatements and incentives are actually worthwhile long term.
Over decades, critics have argued that such deals aren’t likely to produce enough benefit to justify their costs and can cause poaching between neighboring municipalities
While drawing a big investment or company from another state or municipality can help a city, various researchers (including from the Lincoln Institute of Land Policy and Wayne State University) have argued incentives are often not a key driver of business-location decisions, and even when they have an effect, tend not to produce enough economic benefits to justify the loss of government revenue.
Incentives can also beget more incentives, Lincoln researchers wrote in 2012.
“Offering tax breaks to one firm makes it more likely that other firms considering locating or expanding in that jurisdiction will also lobby for incentives,” their report said. “This self-perpetuating cycle means that tax incentives can move from being the exception to the norm, and will be expected by all firms rather than serve as a targeted tax break.”
A 2013 study by the Federal Reserve Bank of Boston concluded that local property-tax incentives nationwide total at least $5 billion to $10 billion per year.
It also highlighted Connecticut’s property-tax exemption for machinery and equipment, which reduced potential local revenues by $57.3 million in 2009, while enterprise-zone property-tax abatements cost the state and its local governments $14.5 million that same year.
The combined cost of those incentives could have paid the salaries for more than 1,000 Connecticut teachers, the report said.
Nonetheless, economic-development experts in Connecticut, particularly from cities, say incentives are necessary to overcome exceedingly high property taxes and to promote growth at a time when Connecticut isn’t seen as a destination for investment.
Hendricson said any deals should be structured so they are based off performance, meaning developers must meet some type of job creation or investment threshold in order to qualify for a tax break.
Hendricson cautions that municipalities shouldn’t lead with tax breaks; they should be a last resort. She says cities or towns shouldn’t accept a project that wouldn’t happen without a tax deal, though she admits not everyone agrees with that philosophy.
“It should be the icing on an already great cake because it can put some development projects over the finish line,” she said.
Here’s a look at how a few Connecticut municipalities use tax deals for economic-development purposes.
Hartford tries to overcome a big tax burden
Despite its oppressive property-tax rate — 74.29 mills, by far the highest in the state — Hartford has been the beneficiary of significant development in recent years, particularly downtown.
But it hasn’t happened without a helping hand.
“Everything substantial that gets built in the city would not get built without a tax deal,” said Hartford City Assessor John Philip. “The tax deals have been getting more and more generous over the years.”
Developers and property owners can access tax-incentive deals in Hartford through two avenues — city government and the Capital Region Development Authority, which is a quasi-public state agency that has helped finance about 1,500 new apartment units downtown since 2013.
Those newly built apartments have been aided by city tax breaks and financing from CRDA, which has been widely viewed as a successful economic-development entity.
In fact, during the recent legislative session, state lawmakers created the Municipal Redevelopment Authority, a quasi-public agency modeled after CRDA that could help fund development efforts in other financially distressed municipalities.
In addition to providing low-interest loans and/or equity investments, CRDA is also able to secure a special tax rate for developers seeking to convert old, run-down office buildings into apartments.
Hartford is the only municipality in Connecticut with a bifurcated tax system that assesses residential properties at a lower tax rate (35 percent of market value) than commercial properties (70 percent of value).
In 2013, state lawmakers, at the urging of the city and then Gov. Dannel P. Malloy, passed a law that allows CRDA-funded office-to-apartment building conversions to be assessed at the much lower residential assessment ratio, providing a major tax break. (It also helped put Hartford’s property-tax rate in line with surrounding towns.)
In turn, the lower taxes allow developers to obtain a bigger and shorter-term mortgage and increase their return on investment, which helps attract more private equity and reduces the amount of necessary public subsidy, said CRDA Executive Director Michael Freimuth.
To date, CRDA has invested close to $100 million of bonded taxpayer funds to leverage redevelopment of 23 ex-commercial buildings into 1,546 housing units in Hartford with a total construction value of $413 million. Those buildings are now generating north of $1 million in new tax revenue to the city, he said.
The first eight downtown Hartford office-to-apartment conversions CRDA co-financed, Freimuth says, were valued at next to nothing and contributed just $220,000 a year in city property taxes.
After conversion, the eight are now worth $20 million and return about $600,000 a year in property taxes, he said.
Fairfield architect-landlord Bruce Becker has been the beneficiary of both CRDA and city tax breaks. He redeveloped the 777 Main St., 26-story office tower into 285 apartments in 2015, an $85-million project that relied heavily on public financing and tax credits, including $17.7 million from CRDA.
Becker also got a 15-year tax break from the city that runs through 2029, city records show. The deal set a fixed property-tax assessment of $2.17 million during the project’s construction phase and then tied future tax payments to a percentage of the property’s gross revenues, records show.
Becker says without the help from both CRDA and the city, his project, which currently enjoys over 90 percent occupancy, wouldn’t have been possible, and that’s not a good thing.
He said a system that fosters an environment in which the city must cut tax deals to make development happen isn’t ideal.
Hartford city government has its own system for granting tax breaks, largely to encourage affordable housing, ground-up development, or other types of projects seen as important to economic development, said Johnson, the city’s development services director.
Deals have taken several forms. In the past, the city has signed ground and/or air leases with developers who then would be exempt from property taxes but would pay an annual set payment to the city in lieu of taxes. That helped Northland Investment Corp.’s Hartford 21 luxury apartment tower get built in the early 2000s. In lieu of property taxes, Northland agreed to make an annual $500,000 payment to the city during the first 20 years of the agreement. Today, that deal is saving Northland more than $6 million a year in city property taxes.
More recently, the city has adopted tax-fixing agreements that tie tax payments to a percentage of gross income generated by a property. The first phase of the proposed $46 million Downtown North mixed-use development and $26 million 108-unit Park and Main Street apartment project have deals like that.
Johnson said tax deals require the city to strike a delicate balance between being opportunistic while also not hurting Hartford’s ability to generate revenues.
A review of city council meeting agendas and minutes show Hartford has considered less than a dozen tax-fixing deals since the start of 2018. CRDA has been more active.
“You can’t have the perception that you are giving away revenues at the expense of providing the essential services that are necessary for the city to operate,” Johnson said.
New Haven’s incentives offer wide latitude
While it’s standard practice for municipalities to offer tax enticements, programs often restrict eligibility to specific geographic areas or types of property.
A few decades ago, New Haven decided to simplify its offering, enacting an as-of-right assessment deferral program. Most new construction, whether commercial or residential, as well as properties in need of rehabilitation are eligible, and the program is citywide.
The only core requirement is that the investment in the property exceeds 35 percent of its assessed value.
In return, the property’s assessed value is frozen during construction, followed by a five-year phase in of the increased property value.
It’s become a popular development incentive in the Elm City, which has a mill rate of 42.98, nearly half of Hartford’s, said Steve Fontana, deputy director of New Haven’s Office of Business Development.
“I think the use of the program has coincided with the influx of investment [into New Haven] generally,” Fontana said.
Fontana said property owners and investors seem to like the certainty the program offers. There are no public hearings or political votes to sweat over. Developers just have to meet the program’s requirements to qualify.
New Haven’s other major development incentive, Fontana said, is the Enterprise Zone Assessment Deferral Program, which is targeted at distressed municipalities. It’s limited to a certain area and certain types of businesses, but it comes with similar property-tax benefits, as well as a credit on the state’s corporate business tax.
As of May, New Haven had 110 properties enjoying tax breaks from both programs, with a combined taxable assessed value of $41.5 million.
But as their exemptions expire, their assessed values will rise by an estimated $182.7 million by 2020, according to Alex Pullen, acting city assessor.
A major portion of that anticipated growth is attributed to 100 College St., an office high-rise that until recently headquartered Alexion Pharmaceuticals.
That 14-story, 513,000-square-foot tower, which cost $100 million to build, enrolled in the Enterprise Zone program and was completed in 2016. Its 10-year Enterprise Zone tax phase-in began last year.
Fontana said incentives can be effective in stimulating growth but should only serve as a “final piece of a conversation.”
“There’s no amount of money a community can offer someone to come to a place they’re not interested in developing or investing in,” he said.
He said he is also well aware of criticisms of tax incentives and that it’s undeniable that some may receive an incentive who would have invested anyway.
“But we’ve made other projects feasible that otherwise weren’t before,” he said.
Windsor, Bloomfield make economic hay with incentives
When developers or prospective employers approach his town with an appeal for property-tax relief to finance a building or open doors, Windsor Town Planning Director Jim Burke is ready to respond.
After all, with property taxes as its dominant local revenue source, Windsor jealously guards it as well as its standing policy that at least 40 percent of its revenue come from commercial taxpayers, the rest residential, Burke said.
“Our objective with our policies,’’ he said, “is we’re trying to keep a high portion of our grand list in commercial properties. We want to have a diverse economy here … to attract people with high skills and those with moderate skills.’’
From 2006 to present, Windsor, with its 32.96 mill rate, has approved nine property-tax abatement applications for developers of manufacturing and Class A office spaces, or any project involving $60 million or more of investment, Burke said.
Prior to that, the town had granted none — a lapse that resulted in several development proposals that ultimately rooted in neighboring communities, Burke said. He declined to identify them.
At one point, Windsor offered limited funding to developers to lay drainage, roads, utility lines and other pre-project infrastructure.
That was replaced, Burke said, with the town’s present tax-abatement regimen.
One of the town’s largest developments in the last decade was the building of a $175 million distribution-warehouse occupied by Walgreens pharmacy. Windsor awarded it a seven-year property abatement that expired in 2017. Windsor has done shorter, three-, four- and five-year abatements for others, Burke said.
The Walgreens facility, which employs hundreds and supplies some 275 Walgreens stores in New England and New York, also received $5 million in state assistance.
The town is careful, he said, to verify that awardees live up to their abatement terms. Tax-break beneficiaries provide the town with two sets of data, to track compliance, such as timely permit filings and on-site inspections.
Award recipients who leave or close shop before the abatement expires, Burke said, must repay all of what they would have owed the town in property taxes without it.
Windsor’s next-town neighbor, Bloomfield, too, has found success with limited offerings of tax incentives, primarily to encourage existing commercial taxpayers to invest in the town.
Jose Giner, the town’s planning and economic-development director, says Bloomfield, which currently has a 37.52 mill rate, in the past has granted property-tax abatements benefiting Geissler’s Market, Kaman Corp., Pepperidge Farms, HomeGoods, Trader Joe’s, Derringer-Ney and Niagara Bottling, among others.
Its newest applicant, health insurer Cigna Corp., recently won tentative town approval for a tax abatement tied to its planned $90 million renovation of the historic Wilde office building.
The abatement runs for up to nine years — four years beyond Bloomfield’s standard five-year abatement — and would save Cigna $2.7 million over that time period.
The town, however, would receive over $8 million in additional property-tax revenue during the abatement period, atop Cigna’s annual $2.4 million real-and-personal-property tax levy. The town also stands to draw from permit fees related to the renovation totaling around $800,000, Giner said.
It’s a delicate balancing act, Giner said of his town’s obligation to residents to collect all fees and property-tax revenue to which they are entitled to pave roads, upgrade facilities, pay down debt, and provide cultural-education programming to residents.
Yet, ongoing competition between Hartford and its suburbs for revenue-generating property development and job creation pressures Bloomfield to act to at least retain what it has.
“People say we’re giving up money,’’ Giner said. “But we don’t have that money yet.”
Property-tax discounts and other incentives, he added, are unlikely to disappear soon, among urban and suburban communities.
“Nobody likes to do them,’’ Giner said. “But the reality is you’re in competition. As long as we have property taxes as a primary source of revenue, we’re going to have them.’’
The Cities Project, a collaboration between CT Mirror, Connecticut Public Radio, Hearst Connecticut Media, Hartford Courant, Republican-American of Waterbury, Hartford Business Journal, and Purple States, will publish periodic articles exploring challenges and solutions related to revitalizing Connecticut’s cities. Send comments or suggestions to firstname.lastname@example.org.