By Lewis McMurran. Lewis has 25 years of experience in government relations, advocacy and lobbying in Washington state, including working with the technology industry, local governments and a Fortune 500 financial services company.

The Washington state legislature failed to extend research-and-development tax incentives this legislative session, and that means these valuable incentives will expire in January.

This failure threatens Washington’s commitment to research and development that has made the state such an attractive home for technology companies. Next year, companies will not be able to defer or exempt sales tax on construction of laboratories or other R&D facilities. Overall, companies investing in R&D will see an increase in their B&O tax due to the inability to take a credit against their R&D spending.

Why? This session, political and budgetary forces worked against the tax incentive. But, the tech industry’s own political apathy also played a role.

The state legislature created these tax incentives in 1995, when our tech industries – information and life sciences – were far smaller. At the time, a state-commissioned study showed that incentivizing research and development could lead to high-paying jobs and additional manufacturing of high-tech equipment. The original tax support was set to expire Dec. 31, 1994.

When expiration loomed a decade later renewal of the R&D tax incentives flew through the legislature with strong bipartisan support. But, the incentives were renewed only until Jan. 1, 2015. The new law also required companies to publicly disclose the amount of B&O credit and sales tax deferral for R&D, including filing out an annual survey.

The surveys and new reports require extensive effort and information and have been used to beat up the state’s tech industry.

This was clear in 2012 when the Joint Legislative Audit and Review Committee (JLARC) undertook its annual review of tax incentives, including those helping high-tech companies.

While the committee made a credible attempt to analyze the impact of the R&D incentives on job creation and other areas, its analysis was seriously flawed — even by the JLARC staff’s own admission. The committee was charged with an impossible task: Show how many jobs the R&D B&O credit directly created. This was nonsense because no single tax incentive ‘causes’ a job to be created. Tax policy is just one of many possible causes.

The committee also failed to examine economic effects of the $8.7 billion spent annually on research and development in Washington. During one of the most difficult recessions in memory from 2007-2012, R&D spending actually grew by $2 billion around the state.

The flawed report took on a life of its own. Legislators who wanted to end the R&D incentives trotted out the report’s negative numbers, without discussing its flaws or positive aspects. Other groups, such as the teachers’ union, (the Washington Education Association) threw out a red herring by asking: “Why does Microsoft need a tax break?” This rhetorical display masked the fact that Microsoft was only one of hundreds of small, medium and large companies that rely on these incentives.

These political attacks, however, did not overshadow the clear need to support research and development. The state Senate voted 36 to 13 to pass SB 6430 in the last days of the legislative session. The final version, though, severely restricted both the B&O credit and the sales tax deferral to a much smaller group of companies and limited the allowed amount of sales tax deferral to a much smaller amount per project.

This revision was made because of budget concerns. All tax-related legislation generates a fiscal analysis that attempts to quantify how much a tax incentive will cost the state in lost revenue. The analysis, however, does little to account for an incentive’s downstream effect, such as increased spending, hiring or revenue that would lead to higher tax revenues.

This inflated analysis projected the R&D incentives would cause the state to ‘lose’ nearly $132 million in revenue during the 2015-17 biennium, approximately 0.4% of the state’s two year budget. This was too much for most legislators. They cut into support, even though the IT industry grew 30,000 jobs between 2005 and 2012 and generated directly and indirectly nearly $3 billion in state tax revenue.

This session, the WTIA and a handful of other member companies fought for R&D renewal in Olympia daily. An absence of more voices from the tech industry, however, meant that legislators simply did not see a political price for not supporting research and development.

Until the IT industry speaks with a more united voice to our state elected officials, we cannot expect to see the business climate, education or any other area the IT industry cares about to improve.