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Retooling the high tech R&D tax credit: Investing in higher ed together

February 26, 2012

As an active entrepreneur in the wireless, software and clean energy sectors–in a career touching seven early stage companies funded primarily by start up private equity–I am fiercely proud of our state’s innovation economy. Now that I serve as a part-time citizen legislator as well, I unapologetically advocate for helping our state’s software, biotechnology, biomedical, wireless, hardware, web and content communities thrive. These industries are a major fuel of our state’s economic engine within the global economy.

After months of behind the scenes negotiations with key legislators, industry representatives, students and university leaders, this week the House Ways & Means Committee will consider my legislation SHB 2532 to reauthorize and reform the high tech R&D tax credit, a popular benefit for companies engaged in advanced computing, advanced materials, biotechnology, electronic device technology, and environmental technology.

The Seattle Times editorial board embraced the policy proposal here. Students at the University of Washington and elsewhere have been passionate advocates for the reform.

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.

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 SHB 2532.

My core objective is to maintain the program–rather than see it expire completely for all companies on January 1, 2015–for early stage, small and medium sized technology companies and ask larger companies to contribute a large portion of the value of the tax credit. The investment of those dollars goes directly to an incremental investment in the University of Washington, Washington State University, Western Washington University and our other top-tier STEM programs.

Proponents of the bill are trying to help our state take a radical step forward in our investment in STEM education to produce not only more mechanical, software and electrical engineers, but more scientists, researchers, math teachers and so much more.

In 2010, 552 high technology companies received $44 million in business and occupation (B&O) credits against their research and development investments. The estimated income levels of the companies taking the tax benefit: 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-$10M; 68 were between $10M-$25M; 30 were between $25M-$50M; 25 were between $50M-$100M; 39 had revenues over $100 million.

The top 16 companies by amount taken for the tax credit in 2010:

BUNGIE, LLC: $711,000
SNBL, USA, LTD.: $443,000
SONOSITE, INC.: $348,000
INSITU, INC.: $339,000
GOOGLE, INC: $280,000
YAHOO, INC.: $260,000

Under the bill, companies with revenues up to $25 million per year would see no change in the value, mechanics or level of the tax credit. Companies between $25 million and $50 million would retain 30% of the current value of the tax credit; companies between $50 million and $100 million would retain the equivalent of 20% of the current value of the credit; companies with revenues over $100 million would retain 10% of the current value. Thus, for example, Microsoft would be eligible for a total value of $200,000 instead of $2 million based upon their R&D for the year.

The tax credit would be reauthorized for an additional 10 years under the bill and the complex reporting requirements would be simplified.

Another key provision ensures that the dollars secured by resizing the tax credit will be controlled by the newly established Opportunity Scholarship Board, a private sector, non profit with members recently appointed by the Governor that is currently tasked with building a public and private partnership to raise funds for higher education scholarships.

There is strong ‘non supplant’ language to ensure that the Legislature continues to invest in these STEM programs within higher education in the regular budget AND that these dollars are used by the universities for incremental STEM degree production rather than diluted into administrative or other non academic purposes.

The estimated $26 million per biennium that could be raised from this reform could be a major, bold step forward for our state’s universities and colleges. It is in no way intended to off-set the Legislature’s horrific systematic disinvestment in higher education. But it is a step forward and it is a measured approach by asking the private sector to join in funding our higher education system in a more direct way.

While some companies and organizations effected by this proposal have, after sincere analysis and study, elected to oppose this legislation, others–most notably Microsoft–have engaged in an extremely thoughtful and rigorous public policy dialogue and have chosen to formally endorse the bill.

One of the ‘teachable moments’ for me in this negotiation process has been the recognition of how much work it is–and how uncomfortable it can be–to question our own comfortable assumptions. Some of my friends in the high tech community are surprised or worse by my sponsorship of this bill.

I ask those friends to look deeper.

From a systems perspective of the need for bold change in our state, just as we need teachers to question the status quo of education because they know the inside deal, and we need nurses and physicians to question the status quo of health care, we also need high tech executives to lead on big issues impacting the high tech community.

Ultimately, that is the beauty, value and integrity that our founder’s envisioned with a part-time citizen legislature.

I am grateful for the depth of assessment and policy debate on both sides, and I appreciate those organizations that have courageously decided to stand together to invest precious dollars into STEM education in our state.

We are so much more than what we’ve become.

Your partner in service,


DISCLOSURE: 1) I have received campaign contributions from a number of the companies and organizations listed in this post. 2) I have previously held economic interests in companies that have utilized the high tech R&D tax credit. 3) I may have financial interests in some of the companies listed or impacted by the R&D through ownership of equities or mutual funds.

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