Lessons for government from the ruthless pace of technology: The R&D tax credit
To most legislators and other folks in government who are not in the technology field, it’s inconceivable to think of Microsoft as anything other than a friendly giant and major economic force in our state. We see economic reports that outline the ripple effect of the company and the entire software field that rival Boeing, agriculture, the University of Washington and other great forces in our state. We casually watch the hiring, and the stock price, but essentially take it for granted that the growth, jobs and wealth creation machine will continue.
That’s why this New York Times article is so important. It’s sobering on many fronts for the Redmond folks.
Microsoft is in the middle of the most profound structural shift in technology since the company was founded, and faces a world of competition that is unparalleled. In my view, the two central drivers of the change are the shift to mobile devices (where customization, personalization and localization are the most essential ingredients) and a movement away from proprietary, hardware-centric systems toward open source, software as a service and other next generation models. For Microsoft’s mobile strategy, a product with tiny market share called “Android” could potentially spell devastation for Microsoft’s entire future in this area. Why? One answer: It’s nearly free. Another answer? The proprietor is a Silicon Valley outfit called Google.
These and other challenges confront everyone, of course, and other Washington players are being impacted as well: AT&T Wireless Services, T-Mobile, Amazon.com, Real Networks and many other technology leaders.
Like the other technology companies in our state, Microsoft has become more and more active in public issues in Washington on an aggressive level since the early 1990s when they kicked their government affairs programs into high gear. Now all of these players and the Washington Technology Industry Association (WTIA) are major forces on a wide range of policy, political, economic issues. (Disclosure: Microsoft, AT&T, T-Mobile, WTIA contributed to my 2008 campaign).
During these very, very difficult times it should come as no surprise that legislators are searching high and low for tax loopholes, or exemptions, that can be closed to help fill the gap of the projected $1.7 billion in 2010, following the projected $9 billion in 2009.
One example of “tax loopholes” frequently cited is the technology research and development (R&D) tax credit.
The 140,000 people of the 36th District are progressive, and I share their general view that we need to work hard to make our regressive and unfair tax system as equitable as possible. I support comprehensive tax reform that would sustain our state’s needs in a more progressive, fair and stable manner. My hope is that one day soon we can take the Gates Commission Report off the shelf.
In our efforts to close loopholes, there will undoubtably be strong forces at work to close tax loopholes, tax breaks and other taxation models that either don’t reflect the true ‘externalities’ of costs or don’t contribute to the goals that were intended. And I’ll be a part of those conversations even though I’m not on the Finance Committee.
Yet I am troubled when I hear Microsoft and other technology companies used as the whipping post for unwise tax breaks when, in fact, I’ve been a part of numerous small technology companies that have leveraged this very tax credit. Did we hire additional technical people because of the credit? Yes. And that investment led to more growth. Does the tax credit serve a specific, measurable and incremental purpose? Yes it does.
The R&D tax credit makes good sense not only because it captures the investment value of incremental new jobs, but it rewards growth in a critical area that provides high wage jobs. I’ve heard claims made, in a disparaging way, that Microsoft alone realizes $23 million in tax credits from the R&D policy. Yet during this recession the core driver of economic recovery and growth is high paying technology jobs, and we want to focus on this growth area.
In my experience with small companies, the tax credit policy leads to specific job growth and, I am afraid to note, at a miniscule (even irrelevant) fraction of the previous Boeing agreement made with such fanfare. One legitimate policy question during these difficult times is whether the tax credit should be narrowed to small businesses only and less so for Microsoft and other giants.
Microsoft is strong today and its competitors Google, IBM, Linux and other companies and technologies are at a war over the next generation of mobile devices and more. Those in government can easily take this battle of the titans for granted and ridicule the use of the technology R&D tax credit as one more give away to the rich and powerful. Or people can look deeper at the economic impact of these companies and the compelling public interest that exists to support real job growth through this avenue.
State government is a monopoly. It is addicted to its own approach to service delivery and cost model and rarely moves unless external forces (media, governors, etc.) come down upon it. The state Department of Information Services, for example, charges other agencies $15 per month per user to host email for state employees because the Legislature sets them up for that model. The cost of the same Exchange product in the private marketplace in large volumes? Probably $0.10 per month per user. It’s easy for government officials to criticize the products, services and costs of the private sector–until they have to live by the same rules (which it doesn’t).
There are a lot of tax breaks that fail to achieve their goals and end up as a subsidy for companies that don’t deserve it and don’t contribute to the common good in the form of jobs, new products and services. And I’m willing to push, prod and agitate for their repeal or redesign. The tax code of our state is as warped as any other and probably more so. Still, despite the common perception, the R&D tax credit is not one of them. In my firsthand experience it works and I’ve seen it directly from the entrepreneurial side. I know people who are working in Seattle today because the tax credit enabled a small company to hire them. People who know me are never surprised to see me throw a fun, friendly elbow Microsoft’s way. I’m a Mac, iPhone, open source loving guy and only use Microsoft products when forced by technology gods. Yet this is not about product support or any one company, of course, it is about our value proposition to the technology community and our efforts to build this vital sector.
I suspect (although I don’t know for sure of course) Washington could save more money by outsourcing email and a few other services than the entire cost of the R&D tax credit to the state treasury combined. There will relentless pressure to cancel this tax credit in 2010. But that pressure, complaint and argument will come from people who are unlikely to believe the New York Times article above.
As Boeing sets the stage for a probable move of their production to South Carolina, we need to introduce an element of humility into our public policy and remember that the technology sector is vital and strong here in Washington not by an act of G-d but by more measurable and modest public policies.
Your partner in service, Reuven.