On January 1, two state tax breaks expired that were decades old, and have been described as fundamental to Washington’s innovation economy. Leaders in the tech and biotech industries were united in calling for their renewal. But following the passage of Washington’s two-year budget on Monday – which leaves the tax breaks dead – industry group CEOs have decidedly different reactions.
At issue are financial incentives for research and development in the state, through a more lenient B&O tax code for companies that conduct R&D, and a sales tax break on the construction of buildings dedicated to it. These sorts of breaks are found in 44 other states, and have been called integral to the state’s economic growth and competitiveness with other regions.
Michael Schutzler, CEO of the Washington Technology Industry Association, described the expiration of the tax breaks as “catastrophically stupid.” Chris Rivera, CEO of Washington Biotechnology & Biomedical Association, has voiced a similar sentiment. But when it comes to the new budget, Schutzler now strikes a more accepting tone than his biotech counterpart.
“This budget is a great example of how compromise should work out,” Schutzler said. “From our perspective on the IT side, I think it’s just silly not to have an R&D tax credit. But the [state’s] old antiquated tax code creates a prisoner dilemma: ‘Do you want to support higher ed, or support this industry?’ Um, both? … You could say the technology industry has, in essence, given up on some tax preferences to make the budget work.”
Making his case for the budget, Schutzler cites elements he sees as important to the state tech industry’s growth. There is funding to support more computer science classes in the K-12 system, for an expanded computer science program at University of Washington, and new cybersecurity bachelor’s degrees at Bremerton-based Olympic College. The agreement to fund transportation infrastructure also “means a lot to the technology industry.”
Most of these items deal with tech's “talent pipeline,” in which more Washington students can be better educated to be skilled tech employees, so companies ranging from Redmond-based Microsoft to garage-based startups don’t have to hunt elsewhere or settle for less staff.
But the “pipelines” for a successful biotech industry include other issues. Rivera argues the budget that was passed this week – which “demonstrates a lack of understanding” on the part of legislators – left these pipelines busted.
“There were things in our toolbox that we had to grow the industry,” said Rivera. “If we didn’t have those tools in the last five to ten years, we wouldn’t be here (with a multibillion dollar biotech industry). Back in my product manager days, you tried to put more resources into your fastest growing products. In this case, more resources keep getting siphoned off. This budget is shortsighted.”
Rivera cited two “tools” as integral to biotech’s continued success in Washington. The first is the tax breaks. The break on B&O helps early-stage companies get off the ground, he said. While it's is true that the break on R&D-related construction mostly benefits mid-to-large sized companies – i.e. the sorts of organizations that construct new buildings -- he said it must also be renewed. In conversations with legislators, many expressed to Rivera a belief that biotech is a startup-oriented industry, and therefore doesn’t need it.
“This may have been true a decade ago,” said Rivera. “Right now, though, companies are being acquired. We want those acquiring companies here. Construction costs will be part of the decision process when they decide to start an office here, compared to California or wherever their home office is. These are jobs being created here. The return for the state is massive.”
This brass tacks financial argument – weighing investment by the state against the monetary return on it – is one he repeats for the Life Science Discovery Fund. As he sees it, this was the second tool to grow the region’s biotech industry. At a cost of about $10 million annually, the fund provides support for research to move from lab to the market, and assists in the commercialization of research from University of Washington, Fred Hutchinson Cancer Research Center, and other research institutions.
The state budget completely defunds LSDF, despite a seven-to-one return on investment (to learn more about LSDF’s defunding, read this and this). Compared to Oregon, which recently invested $200 million into life science research, Rivera said “our state policy leaders just don’t get it.”
Rivera vows to “continue fighting,” with plans to push the governor to maintain part of LSDF’s funding through executive action. “It’s a shame [my organization] has to use political capital for common sense things like this, instead of real strategies to build this industry in decades to come.”
When a state is forced to meet its financial obligations by killing programs like LSDF – a “top quartile performer” if it were a venture fund, Rivera said – something is wrong on a fundamental level. On this point, both Shutzler and Rivera agree. Both focus their criticisms on the state's B&O tax system, which they argue tax startups way too much before they can get profitable.
“There is strong belief in the industry that the tax code is antiquated and needs to be rethought,” said Schutzler. “It’s 80 years old! The industry would not pressure for B&O tax credits to be reborn if you rebuilt the B&O tax to be more progressive. As you grow revenue, you pay more taxes. If you create a company with billions in revenues, you should probably pay more. There's a gain for the industry and the state."
However, some argue other outdated aspects of the tax structure include its lack of income and capital gains taxes, which leaders in both industries have opposed in the past. Schutzler takes issue with the notion that the industry isn't contributing enough to state coffers, noting the sector provides a huge portion of the state’s tax base, invests heavily in education initiatives, and is “hands down one of the most philanthropic industry sectors in country.”
Whatever the reasons for the state’s budget woes, Washington may end up being a victim of its own success, Rivera argued. During budget negotiations, the state received a new revenue forecast that came in higher than expected. Republican budget chief Sen. Andy Hill cited this as proof that the tax code required no major changes. Hill's Senate budget was the source of LSDF’s demise, with both the House and Gov. Jay Inslee proposing to keep the program funded.
“If you look at the [revenue] forecast, there’s three billion more in this biennium budget than in the last one,” Rivera said. “If you dig into it, that revenue is mostly from jobs created by the innovation economy. In business school, that’s called an opportunity cost. If the state doesn’t invest now, that tax base goes down. Simple as that. I hope Olympia will take a look at itself, and realize where we need to go.”
