On Friday morning in Olympia, the House Finance Committee, http://www.leg.wa.gov/house/committees/FIN/Pages/default.aspx, will have a public hearing on House Bill 2038, http://apps.leg.wa.gov/billinfo/summary.aspx?bill=2038, a comprehensive bill to raise about $1 billion in revenue.

There are a wide range of provisions to raise money for education, including extending a B&O tax surcharge of 0.3% that was supposed to expire on July 1 is now made permanent.  This affects businesses in the “services” category–about half of the state’s employment base.  These companies including most in the technology industry will keep paying 1.8% B&O instead of going back to 1.5%.

The other very concerning provisions are sections 701 and 702 of HB 2038, which essentially eliminate the tax incentives for R&D that have been on the books since 1994.  The legislature’s desire for more tax revenue can lead them to cut off their to spite their face.  This is one of those cases where their desire to fund K-12 and higher education (a good thing!) will unfortunately come at the expense of high paying family wage jobs going to other states, if these sections become law.

The state’s high-tech industries, inlcuding software, digital media, life sciences, web services, e-commerce, wireless and others have grown dramatically since the early 90’s.  They have grown at a much faster pace overall than any other industries, inclduing aerospace, which has seen some big employment swings.  The tax incentives for R&D (a B&O credit and sales tax deferral) have made Washington more competitive, reduced the high expense of performing R&D and helped attract and retain high-tech companies in Washington.

Much of the underlying reasoning for the elimination of the R&D incentives is due to a flawed report produced by the Joint Legislative Audit and Review Committee (JLARC).  This committee did an exhaustive examination of a large number of tax credits. exemptions and preferential rates.  They did a very good job of examining these tax issues but applied an impossible standard to the R&D incentives in their analyses.  They attempted to show causation between the B&O credit for R&D and jobs created.  Such a link is almost impossible to make since job creation depends on many factors–only one of which is the availability of a tax credit.

At the same time, the committee staff that did the report disclosed that the economic model they used was flawed.  Certain legislators have chosen to ignore that and look at a faulty conclusion instead.  Also ignored is the vast amount of information collected by the Dept. of Revenue submitted by those taking the R&D incentives. 

Here is the link to the JLARC report: http://www.leg.wa.gov/JLARC/AuditAndStudyReports/2012/Documents/2012TaxPreferenceReviewsProposedFinalReport.pdf.  It is quite long and detalied.  the high-tech/R&D section begins on page 99 through 115 (page 95 on the text).

Here is the link to the annual Dept. of Revenue report on tax incentives: http://dor.wa.gov/docs/reports/2012/DescriptiveStatistics2012.pdf Chapters 6 and 9 relate specifically to the two high-tech R&D incentives.

WTIA will be at the hearing Friday morning to oppose the elimination of the R&D incentives.  We are very sympathetic to the state’s desire to fund K-12 and higher education.  The state’s tech industries pay hundreds of millions in B&O taxes and hundreds of millions more in sales and local taxes.  We have grown hundreds of thousands jobs over a long period of time contributing greatly to the state’s prosperity and relevance. 

The state is going to experience about $2 billion in new revenue over the next two years just through organic growth.  It doesn’t seem necessary to eliminate the one good economic development tool for tech-based industries.