You may already be aware of the tension in Olympia this legislative session as legislators try to close a $2 billion budget gap.  Whether coming from the public sector or the private sector, the debate over raising taxes and/or cutting spending is intense and emotionally charged.  The tech industry – and the tax incentives it receives – is a subject of discussion in this heated exchange.

The WTIA is a huge proponent of improving the quality of education in Washington’s K-12 system and of increasing STEM related degree capacity in our higher-ed institutions. We have effectively advocated for these positions through the efforts of Lew McMurran, VP Government Affairs, our policy committee and the coalitions we have formed with other organizations serving the tech sector as well as the newly formed Information Technology Coalition which will be engaging in advocacy for tech during this legislative session.

The WTIA also supports the extension of R&D tax credits.  In Washington as in 43 other states, these incentives are used to encourage innovation and entrepreneurship.   There’s hard data, not to mention economic  theory, that supports the ROI that’s been delivered to the state as a result of having them.  There’s “soft” data too—if you think tax policy for innovation to thrive isn’t required, ask Flowroute.

Unfortunately, a new narrative has emerged that seeks to tie funding of public education in Washington to reducing or eliminating the B&O tax credit for R&D expenditures.    The argument might seem reasonable if you presume that the elimination of one should pay for the other.   However, recent history belies that presumed linkage.    During the time that these incentives have been in place – and the high tech industry has been on an amazing growth trajectory (more on that in a minute), the state has actually shrunk the priority that education has received in the budget.  In fact, since the 1993-95 biennium, the state’s total near general fund (NGFS) spending has climbed from $16.3 billion to just over $31.0 billion.  Yet during that time period, the share of funds going to K-12 education has declined from 47% of spending to 44% spending.  Similarly, spending on higher education has decreased  from 11% to 9% of the budget.

On the other hand, the technology industry has done its share.   Let’s look at some numbers on the contribution of tech to the state’s economy since 1990:

• While the state overall increase in employment has been roughly 14%, tech employment has increased by 119%
• And the growth in these companies and their supply chain has led to a 318% increase in tax revenue to the state from technology companies and jobs
• 54.7% of personal income growth is attributable to the tech sector

The state needs to fund education – no doubt about it.  But before we grab for the low-hanging-fruit-solution, it’s important to understand at least a little of the theory on tax incentives.    The Washington Research Council just published a report on the subject.  It’s an important read as we consider these tough budget issues.  A few key points in this report are

• in spite of our business tax incentives, Washington has one of the heaviest business tax burdens in the country.  From 2010 to 2011 they increased 7.5% which was the 7^th highest of all states.
• tax preferences are a way of normalizing tax structure;  although labeled incentives, they are usually mechanisms to offset disincentives to economic development
• tax incentives essentially represent government spending for favored activities or groups through the tax system rather than through direct grants, loans, or other forms of government assistance

The following is taken directly out of the WRC’s report.  It’s an excerpt that provides a higher order of consideration on why these incentives matter in and of themselves.

The existence of significant knowledge spillovers means that the creators of new ideas are not always fully compensated for their efforts, as some of the benefit of their research inevitably accrues to others.

The most important kind [of knowledge spillovers] flows between private companies.   Innovative companies that invest in research appropriate just some of the benefits of their efforts…

In one of the most rigorous studies to date, two economists—Nick Bloom of Stanford and John Van Reenen of the London School of Economics—followed thousands of firms between 1981 and 2001 and found that the spillovers were so large that R& D investment of one firm raised not only the stock price of that firm but also the stock price of other firms in the same industry…

A significant part of the spillover is local, because it occurs between firms that are geographically close…

The problem is that the market provides less investment in innovation than is socially desirable, because the return on such investments cannot be fully captured by those who pay for it. The only way to correct for this market failure is for the government to step in and compensate those who in-vest in R& D for the external benefits that they generate.

This is the main reason that the United States government, as well as governments in most industrialized countries, subsidizes R& D through tax breaks. . . .

The problem is that the difference between private and social return on innovation is much larger than the current subsidies…The lessons for economic policy are clear: the current U.S. tax credit for corporate spending on R&D is far smaller than it should be. . . . Because the benefit of spillovers is in part local—helping some communities but not others—the efficient distribution of cost is one in which state and local governments also contribute to the subsidy.

No question that we are facing a very tough legislative session, but the cry from the tech sector for prioritizing and improving the quality of education is not a whine and the intention to solve it through reducing tax incentives to the innovative industry that is driving our economic advantage is short sighted. Let’s get educated about both sides of this debate and respond with heart and head for the best possible outcome.

Contact your state representative to be heard on this important trade-off debate:

http://www.capwiz.com/techvoice/wa/home/

-Susan Sigl
CEO, WTIA