Washington state’s biotech community is fighting a state legislative proposal to cut spending on R&D tax credits to fund a program to train students for technology degrees. The measure effectively pits two of the state’s more successful industries against each other: biotech versus the high-tech industry led by the state’s second-largest private employer Microsoft, which supports the proposal.
At issue is House bill 2532, introduced by state Rep. Reuven Carlyle (D-Seattle). The bill would shrink a credit for R&D expenditures, part of the state’s business-and-occupation tax, by limiting the percentage of credit for companies with revenues of more than $100 million in return for extending it seven years, to 2022.
Companies with up to $25 million in revenue wouldn’t be affected by the R&D tax credit rollback. Above that figure, the rollback would be scaled in: Businesses making between $25 million and $50 million would retain 30% of the current value of the tax credit; between $50 million and $100 million, 20%; and over $100 million, just 10%. The current credit expires in 2015 and has no limits on the size of eligible companies.
“When we’re simply running out of money and eviscerating so much of the core of what we should be doing, we simply need them (high-tech companies) to contribute,” the Seattle Times quoted Rep. Carlyle as saying during a hearing Tuesday of the state House of Representatives’ Ways and Means Committee.
In a February 26 post on his blog, Carlyle noted that in 2010, 552 high technology companies received $44 million in business and occupation (B&O) credits against their research and development investments. Of those companies, most beneficiaries were indeed smaller businesses:
- 146 had less than $500,000 per year in revenues
- 45 had between $500K and $1M in revenue
- 128 were between $1M and $5M
- 71 were between $5M and $10M
- 68 were between $10M and $25M
- 30 were between $25M and $50M
- 25 were between $50M and $100M
- 39 had revenues over $100 million.
Of the top 16 companies receiving tax credits in 2010, five had a presence in the life sciences. Number one, at $2 million in credits, was the contract R&D 501(c)3 charitable trust Battelle Memorial Foundation, the same amount as Microsoft and CH2M HILL, a lab planning & design firm whose expertise includes biocontainment facilities.
Battelle manages the Pacific Northwest National Laboratory, which in 2009 opened a $77 million Biological Sciences facility and computational Sciences Facility, focused on research in biological systems science and data-intensive computing for NIH, the Department of Energy, the Department of Homeland Security, and other federal agencies.
Not surprisingly, Battelle opposes rolling back the tax credit. “If you’re going to stop the cutting and are going to start reinvesting, you’ve got to have a framework. You can’t just backfill cuts,” Marc Cummings, director of policy and external relations for Battelle, said at the hearing, according to the Times.
Other bio beneficiaries of the tax credit include Sharp Laboratories of America, the R&D lab whose operations include a research effort in biosensor transducer technologies, $499,000; the preclinical contract research organization SNBL USA, a subsidiary of Japan-based Shin Nippon Biomedical Laboratories, $443,000; and Covance Genomics Laboratories, $380,000. Two ultrasound equipment makers also gained from the tax credit: Philips Healthcare Ultrasound, $454,000; and SonoSite, $348,000.
“Since the program was created in 1994 thousands of companies have realized hundreds of millions in value from this tax credit. In previous years, the tax credit was easily justified in order to encourage research and development that is so easily relocated around the globe,” Carlyle wrote. “Today, however, as the tax credit is slated to expire in 2015, and our state struggles through the Great Recession, our world has dramatically changed and it’s time to rethink the role, value and design of the high tech R&D tax credit. But this is not merely about tax policy, it is about the value of investing in higher education together. That is my real goal in introducing HB 2532.”
Money diverted from the tax credit would flow to a new Opportunity Scholarship Board that would award funds to public higher-education institutions for programs to increase the number of degrees in science, technology, engineering, and mathematics. The board would consist primarily of business leaders.
The state hopes to bridge the gap between projections by three state agencies that 2,863 jobs will be available annually between 2014 and 2019 for those with bachelor’s degrees in computer science, engineering, software engineering, and architecture and the fact that only 1,665 students graduated with such degrees in 2010.
Chris Rivera, president of the Washington Biotech and Biomedical Association, said at the hearing that while his group supports increased higher-education funding, “we don’t think the current bill is the long-term solution to that problem.”
It’s not the first time state lawmakers have considered increasing the tax burden of biotech employers. Back in 2010, Washington state lawmakers considered more-than-doubling the business and occupation tax surcharge imposed on nonprofit research institutes engaged in R&D as well as their startup spinouts and other biotech businesses.
Lawmakers withdrew the proposal following objections by the state biotech association, the Washington Global Health Alliance, and several local bioindustry leaders. Leroy Hood, president of the Institute for Systems Biology, told GenomeWeb at the time that while that bill was not likely to hurt the institute short-term, “the longer term is very unclear. I think the biggest impact that it will have is that it will reduce the attractiveness of startup companies in Seattle.”