I’m still fired up to go one more round on the importance of the tech sector getting more involved in public policy in general and in understanding our state’s investment in R&D specifically.

For the in-general part or why-care-about-public-policy, here’s a piece from favorite VC blogger Fred Wilson on why his VC firm spends so much time on policy stuff.  USV’s specific focus is on government regulation of networks but their overarching philosophy is “that policy and governance will be as important as technology in shaping what the market looks like in the coming years . . . so our policy work is ultimately an investment in the success of our portfolio companies.  And that is why we spend so much time on policy stuff.  ”   Similarly for the WTIA, policy and governance emanating from State government will have an incredible impact on the competitiveness of technology companies located in Washington.  So our policy work is ultimately an investment in the success of Washington’s IT sector and that’s why we spend so much time on policy stuff.

Key WTIA policy priorities include R&D tax incentives and a sales tax deferral for building R&D facilities.  Our stated position is “no action should be taken to reduce or limit the application or amount of tax credits under these programs. No additional reporting requirements should be added. Both of these tax credits should be made permanent (both expire January 1, 2015)”.  We also call for increases in the State’s funding of STEM degrees in the State’s four-year institutions.

While both of these policies are critical investments in the long term competitiveness of Washington State and its citizens, some who are engaged in this discussion are pitting them against each other by suggesting that tax incentives should be eliminated in order to pay for higher education.   Please read Rep. Pollett’s Statement on Providing Funding for Higher Education.

Economists have theorized and policy makers implemented R&D tax incentives as an economic development tool for decades in order to offset the inherent riskiness involved in R&D and in so doing cause more of it to happen in their borders.  By bringing R&D home, governments help produce jobs that have a high multiplier effect and expand the local economy by producing goods that are sold to customers worldwide.  The use of R&D tax incentives in competition among states over business location decisions has expanded significantly over the past 15 years because all states want these jobs and the economic activity that comes with them.  Washington has seen the powerful impact that R&D tax credits have contributed to our economy since the 1^st one was enacted in 1994. Sales and B&O tax payments from the tech sector have grown 318%, a rate that’s four times the rest of the state. In 2011, the industry generated $2.9 billion in these taxes – dwarfing the size of the incentives.

Measuring the cost and benefits from R&D tax incentives can be difficult for policy makers.    Much of the current justification for eliminating or reducing Washington’s R&D tax credit is based upon a report by the Washington Joint Legislative Audit and Review Committee (JLARC).   Before we accept this report as gospel, let’s look at a few areas in which the JLARC study falls short.   In response to the JLARC study, the Information Technology Coalition, an initiative of the WTIA, commissioned a report that points out the short comings of the JLARC report:  JLARC rebuttal.   The JLARC study did not measure the spillover effect or the impact of indirect job creation; it did not address the competitive disadvantage that Washington would begin to suffer as it eliminates or reduces these incentives; it did not address the impact on early stage companies of having no offset to the top line B&O tax from investing in R&D; it did not reflect that Washington is already the 7^th state in the U.S. for the highest business tax structure.

It goes without saying that greater investments in higher education are essential to the long term competitiveness of the State.  In fact, a recent report by the Washington Roundtable showed that Washington has a significant number of chronically unfilled jobs – currently as many as 25,000 – due to the skills gap that exists here and that the state could add in total 160,000 new jobs (through the multiplier effect) by meeting this demand and in so doing could add $720 million in new state tax revenues and $80 M in new local tax revenues annually.

http://waroundtable.com/pdf/resources/BCG_WRT_Great_Jobs_Within_Our_State_March_2013_report.pdf

So pitting R&D tax incentives against higher education is denying the reality that both must be done.Tech is perceived as the deep pockets, low-hanging fruit from which our current state budgetary problems can be alleviated.  This is the momentary short term solution.  What it means for the long-term is of greatest concern.   As an industry we must pay attention to the decisions that are being made in Olympia that will affect us for the future.  And we must be willing to take action.   I’ll close with the opener from Fred Wilson and a reminder as why a VC firm in NYC cares about policy stuff . . .”policy and governance will be as important as technology in shaping what the market looks like in the coming years”. 

When the time comes, please be join with us in engaging and responding to proposals.  WTIA will keep you well informed on how these legislative considerations can be effectively responded to.
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