The Story Behind Washington State’s 1994 High Technology Tax-Incentive Legislation
“Birth of a Bill” was published by Heller Ehrman White & McAuliffe, a full service law firm with offices located in Seattle, Tacoma, Anchorage, Portland, San Francisco, Palo Alto, Los Angeles, and Hong Kong. It was written from the perspective of advocates from the biotechnology industry (WBBA). Heller Ehrman is no longer in business. The High Tech Tax Bill was reauthorized by the Washington State Legislature in 2005. It will be considered again for reauthorization in the the upcoming years. The bill has benefited the cleantech sector (see here).
The seeds of the success of Governor Lowry’s high technology tax-incentive legislation this year were planted over a decade ago and began to bear fruit during the 1992 gubernatorial transition and the 1993 legislative session. The successful efforts of the Washington Biotechnology & Biomedical Association in 1993 and 1994 resulted in a very favorable piece of legislation for the industry and substantially increased the level of knowledge in the Legislature about the biotechnology industry and its importance to the state.
The father of this effort is Steve Duzan, who, as the Chairman of Immunex from 1981 to 1993, crusaded in Olympia and around the state and nation for a tax structure that would provide more incentive for the growth of the biotechnology industry. In 1992, Steve and Immunex’s Tom Ranken took then candidate Mike Lowry on a tour of the Immunex manufacturing facility in Bothell and began to make yet another convert.
During the transition from Governor Gardner to Governor Lowry in late 1992, H. Stewart Parker, Chief Executive Officer of Targeted Genetics, was asked to serve on a tax advisory committee for the incoming Administration. In that forum, she raised issues concerning the inequity of the state tax system as it applies to an industry heavily involved in research and development. Responding to these concerns, Governor Lowry included in his 1993 tax package a proposal to expand the sales tax deferral program for biotechnology plants and equipment. This section stayed in the bill until late in the 1993 session, but was dropped before final passage.
Shortly after the 1993 session, the Governor asked the Department of Revenue to develop a tax proposal for the 1994 session that would focus on benefitting the high-growth, high wage sectors in the State’s economy. The effort was led by the Director of the Department of Revenue, Len McComb; Deputy Director, Sandi Swarthout; Assistant Director for Legislation and Policy, Russ Brubacker; and Dick Gebhart, the Department’s Chief of Research. It was this early Department work that led to the initial versions of the bill and supporting materials that were so persuasive with the Legislature.
As part of the consultation process, Deputy Director Swarthout and several key Department of Revenue staff members met on July 27, 1993 with Howard Mendelsohn, Corporate Controller at ICOS, Stewart Parker, and Phil Ness from the Department of Trade, to lay the groundwork for new tax legislation which would benefit high technology and biotechnology companies in the state. They discussed the “mistaken” classification of collaborative research payments as contract research and development and the resulting higher tax rate. They also discussed several other aspects of the tax law which created an unfair tax burden on biotech companies in Washington as compared to other states.
Meanwhile, the Association was continuing a strategy of looking for ways to advocate for the type of tax changes the Department of Revenue was working on and, at the same time, to increase the profile of the biotechnology industry with the Legislature and the public so future legislative proposals would have a favorable reception.
In the process of the Association’s work, Immunex’s Tom Ranken, then Chair of the External Affairs Committee and now Board President, and Howard Mendelsohn met with Heather Bell and Pat Dunn of the law firm of Heller Ehrman White & McAuliffe and Vicki Chiechi of Capitol Assistance a number of times to receive assistance in planning a legislative reception and tour of several member companies in Bothell. Pat coordinates Heller Ehrman’s representation of clients in Olympia with the Legislature and administrative agencies, and Vicki, a veteran lobbyist, works with Heller Ehrman in Olympia and also represents a number of other prominent clients.
After these meetings and some quiet reconnaissance in Olympia, it became clear the Governor and the Department of Revenue were committed to consideration of a tax bill to provide incentives for the industry, and that such a bill would have a fighting chance in the 1994 session. A number of events made the political landscape in 1994 quite different than in 1993 and provided fertile ground for a targeted high technology tax incentive program. In the 1993 session, the new governor found he had to make major program cuts and increase revenues to fill a $1.2 billion shortfall in the State budget created by high spending levels and a two-year slowdown in revenue from a faltering economy. In the fall of 1993, the voters approved Initiative 601, which had the effect of limiting the amount of funds the State could raise and spend to an amount specified by a formula based on past spending patterns, population increases, and inflation. This limit becomes effective in July, 1995. In late 1993 and early 1994, the State’s economy began to improve and it became clear that the amount of revenue that the State’s tax system was going to produce in coming years would be in excess of the 601 amount that the State could spend. For that reason, policy-makers found themselves in the enviable position of being able to make responsible tax cuts and not affect the level of State spending. The Governor, the Department of Revenue, and the Association realized this new reality early in the process and were able to present the biotechnology tax proposal and its rationale to the Legislature ahead of a number of other proposals for tax adjustments which would benefit other constituencies.
In late 1993, the Association and its Board of Directors saw the opportunity to pass meaningful tax legislation and committed the resources to make a major effort in the 1994 Session. This effort was predicated upon the very strong support of Governor Lowry and his Revenue Department team. Revenue’s Connie Michener most ably coordinated the agency’s legislative effort and Mike Gowrylow provided the press savvy to get the word out to the public about the Governor’s proposal. The work of explaining the importance of the industry to the public had been done extremely well over the past years by Phil Ness of the Department of Trade and Economic Development. The slide show Phil developed to introduce the basic facts about the industry was particularly effective. The slide show illustrated the size, diversity, and economic impact of the industry on the State. The data in the slides was derived from information generated by the Association for its 1993 Biotechnology Industry Survey.
The Association team in Olympia was led by Tom, Howard, Karen Lane from the Fred Hutchinson Cancer Research Center and Chair of the External Affairs Committee, and a special committee of the Association brought together to focus on the technical aspects of the legislation. Tom and Howard dedicated many days and nights during the months of January, February, and March to this effort. They became well known in Olympia, and no one doubts that if they, with the support of Immunex and ICOS, had not made the substantial commitment of their time, the legislation would not have passed, and the bill would not have included the provisions which are so favorable to the biotechnology industry. The Association’s Olympia team was rounded out with Pat, Vicki, Heather, Lori Johnson of Vicki’s staff, Steve and Patsy Excell who assisted with key press briefings and advice, and Mike Ryherd, the veteran lobbyist for Fred Hutchinson. In addition to the biotechnology industry, major efforts on behalf of the legislation were made by the software and electronics industries, McCaw Communications, The Boeing Company, and environmental industries.
In December, 1993 and January, 1994, with Howard Mendelsohn as the lead, Howard, Tom, and Karen Lane worked with the Department of Revenue to refine the technical aspects of the bill to ensure that it provided the necessary tax relief for the biotechnology industry that would provide incentives for the long term job creation desired by Governor Lowry. Lance J. Lamprecht of KPMG Peat Marwick along with his boss, Dave Wittrock, did an outstanding job of financial analysis and took economic information derived from the Association’s survey in order to develop economic impact models of the various proposals. These studies were submitted to Dick Gebhart and his staff of economic analysts at the Department of Revenue for use in deriving the fiscal notes and economic impact data necessary to accompany a bill through the legislative process. The bill, unlike most major pieces of legislation in Olympia, changed very little in the legislative process because of the thorough work of the Association team, and the professional competence of Ron Rosenbloom of the Department of Revenue who drafted the bill language.
Several Association members, including Lee Parker from CellPro, Greg Sessler from Microprobe, Jon Case from Targeted Genetics, and many others, arranged for legislative tours of companies and set up meetings to introduce the biotechnology industry to legislators and explain the technical details of the Governor’s proposal. On the meeting front, Lori Johnson receives a gold star as the quickest and most successful meeting arranger in Olympia.
The 1994 regular session was only sixty days long with a special session of a few days, so legislative efforts were intense. The Governor and the Department of Revenue were stalwarts. The Governor regularly mentioned the proposal in discussions with the press and on February 22 he visited several high technology companies, including CellPro, ATL, and ICOS, and held a press conference to provide additional support and publicity for the proposal. Especially helpful to the Association in setting up the Governor’s press conference were Lacy Fitzpatrick, Leslie Muzik, and Diane Rosman of ICOS.
In the course of the Association effort, there were over 200 individual meetings by the Association team with legislators and State officials. This concerted effort paid off when the Legislature and the Governor were faced with a number of tax reduction proposals and had to choose which to approve and which to reduce or not approve. In the end, the legislation received bipartisan support in the House (78 yes; 15 no; 5 absent) and in the Senate (34 yes; 11 no; 4 absent). Strong support in the Senate was provided by the Democratic Majority Leader, Senator Marc Gaspard; Caucus Chair, Senator Sid Snyder; Chair of the Senate Ways & Means Committee, Senator Nita Rinehart; Senator Sylvia Skratek, the prime sponsor in the Senate; and Senator Rosemary McAuliffe from Bothell. The proposal also had strong support from Republican Senators Dan McDonald and Alan Bluechel, who helped to make sure that this was not a partisan issue. In the House, the bill had strong support from the Democratic Speaker, Representative Brian Ebersole; Majority Leader, Representative Kim Peery; Revenue Committee Chair, Representative Greg Fisher; and Representatives Barbara Cothern and Linda Johnson. Representative Cothern set up important briefings for new legislators early in the session, which were particularly important because of the large number of freshmen.
The prime sponsor in the House was Representative Bill Finkbeiner. Representative Finkbeiner worked extremely hard for the passage of the legislation and consulted on a daily basis with the Association team throughout the session.
The Legislature voiced a number of concerns with the proposal: (1) should the State target one particular business sector to the exclusion of others; (2) is the high technology sector the right sector to target; (3) will the high technology industry grow anyway and not need state assistance; (4) will the manufacturing and research jobs in the high technology industry actually go to Washington State residents; (5) is employment in the high technology industries diverse enough; and (6) are other industries, which had borne the brunt of the 1993 tax increase, more deserving of tax relief.
In the end, the Association team successfully addressed these concerns and the Legislature felt comfortable with the proposal and the industry, and enacted the Governor’s proposal almost in its entirety.
State policy-makers were very impressed by the effort made by the Association team and the fruits of that effort present many positive opportunities for the Association and its member companies in the future.