Yesterday, April 24 the Washington state House of Representatives passed Engrossed Substitute House Bill 2038 by a vote of 50-47.  

This bill leaves the B&O rate for services at 1.8%, removing the temporary nature of the B&O increase from 2010.  This raises over $500 million in the next two years.  ESHB 2038 requires all the additional tax revenue from the increased B&O to go into K-12 and higher education. 

WTIA members and others in the technology sector are affected by this as most fall into the “service” category for B&O taxation.  In a survey of tax issues that WTIA recently sent out, members provided a somewhat mixed view on the B&O rate extension.  Half of the respondents want it to go back to 1.5% while the other 50% opted for either no position or support for the 1.8%. 

However, another part of ESHB 2038 is even more troubling.  That is the elimination of the tax incentives for R&D.  This tax incentive has two parts:  a B&O credit against “qualified” R&D spending and a sales tax deferral for building R&D facilities.  

Over 500 companies take advantage of the B&O credit, from the top level allowed of $2 million down to $10,000 (or less in a couple of cases).  These are used primarily by IT/software and biotech/life sciences but companies in electronic devices, advanced materials and environmental technology are also eligible. 

The sales tax deferral is used by entities of all types, including non-profit and public institutions.  This helps defray the costs of constructing expensive buildings and labs.  The sales tax deferral for R&D can save entities almost 10% on construction in King County. 

Unfortunately the majority in the state House have been bamboozled by a report from a joint legislative committee called “JLARC” or the Joint Legislative Audit and Review Committee.  One of their tasks is to review various tax incentives and “preferences” and report to the legislature.  The JLARC did so last summer and fall.  

One of their reviews was on the R&D tax incentives.  You can find that report here: http://www.leg.wa.gov/JLARC/AuditAndStudyReports/2012/Documents/2012TaxPreferenceReviewsProposedFinalReport.pdf

The R&D report starts on page 99.  While the JLARC did a comprehensive job examining the R&D tax incentives, they also tried to quantify how jobs were created “as a result” of the B&O credit.  JLARC ignored the sales tax deferral claiming not enough entities used it to make an analysis. 

By using the standard of “as a result”, JLARC tried to establish “causation” of jobs by tax credits.  This is simply impossible.  Tax credits or tax preferences cannot, in and of themselves, “create” jobs.  They can prepare a foundation, along with other factors, for job creation.  Which is exactly what the R&D incentives have done. 

The JLARC report provides a mixed, incomplete and muddled picture of the effectiveness of the R&D tax incentives.  Too many legislators are glomming on to the negative aspects of the JLARC report while ignoring the positive ones and ignoring JLARC’s own admissions that their economic modeling tools and data collection are faulty and flawed. 

Too many, particularly in the majority in the House, mistakenly believe there will be no negative consequences by raising taxes on companies doing R&D in Washington.  Too many think it’s all about Microsoft and Google. 

While legislators are rightly concerned about education funding, especially in the wake of the McCleary decision, they continue to fail to put K-12 first and higher education second.  The problem with spending isn’t necessarily because of education.  Every year K-12 gets more money.  It is all the other social service and health care spending that is driving the increases in the state budget. 

The leadership in the House is also uncommitted to higher education.  They hold the higher education budget hostage and then tell the tech industry that we have to “give up” R&D tax incentives to get more STEM degrees.  We reject this kind of political gamesmanship.  Kudos to Rep. Larry Seaquist, the House Higher Education chair, for doing his absolute best to make higher education and STEM degrees a priority.  Unfortunately too many of his colleagues do not see it his way. 

With the legislative session coming to an end this Sunday, there will be a lot of pressure on the tech industry to pay more in taxes.  Since the tech industry already pays hundreds of millions in B&O taxes, hundreds of millions more in sales and property taxes, has created tens of thousands of jobs at high wages in the last 10 years, we simply do not see the need to “give up” the one useful economic development tool the state offers. 

WTIA will certainly compromise on the parameters of the R&D incentives but not so much that only the smallest companies can benefit. 

Here is a link to ESHB 2038 and its bill report:

http://apps.leg.wa.gov/documents/billdocs/2013-14/Pdf/Bills/House%20Bills/2038-S.E.pdf  see sections 501 and 502 for the R&D parts.

http://apps.leg.wa.gov/documents/billdocs/2013-14/Pdf/Bill%20Reports/House/2038-S.E%20HBR%20APH%2013.pdf  bill report

JLARC report: http://www.leg.wa.gov/JLARC/AuditAndStudyReports/2012/Documents/2012TaxPreferenceReviewsProposedFinalReport.pdf  R&D section begins on page 99

WA Research Council report on tax preferences: http://www.researchcouncil.org/docs/PDF/WRCTaxes/LevelingPlayingFieldFeb2013.pdf

Washington state legislature:  www.leg.wa.gov