Where We Stand: The High Technology Tax Laws

By Eric Viola, WCTA Public Policy Analyst


The Business and Occupation High Technology Tax Credit was enacted in 1994 to support Washington’s fledgling high tech sector.  High tech business in Washington now account for more than a quarter of jobs in the state.  Due in large part to a convergence of funding concerns for other programs and the credit’s renewal date, the High Technology Tax Credit was not approved for renewal.  The question remains whether the credit’s original goal, to encourage long term job creation, has been accomplished to a level where tax incentives are no longer necessary.

The Business and Occupation High Technology Tax Credit (RCW 82.04.4452) traces its origins to the 1994 regular session.  Backed by Governor Mike Lowry and Representative Bill Finkbeiner in an effort to boost Washington’s nascent biotechnology sector, the bill proposed to offer a tax credit for research and development in high tech fields.  The State Legislature’s chief concerns were:  whether or not the industry would be able to grow without tax incentives, whether or not new jobs would go to Washington State residents, and whether or not other industries—who shouldered the weight of tax increases a year earlier—were more deserving of tax relief.[i]

The team of financial analysts and association leaders who originally assembled the tax credit were able to put the Legislature’s concerns to rest, and Governor Lowry signed the bill into law in 1994.  The next ten years saw enough success in the sector that the law was renewed in 2005 and again in 2012[ii].  As of January 2014, the high tech sector represented 28% of jobs in Washington State and accounted for more than two-thirds of job growth since its inception in 1994[iii].  From 2007 to 2012 alone, R&D investment in this sector in Washington increased from $6.7 billion to $8.7 billion[iv].

To receive the B&O tax credit, taxpayers must engage in research and development in one or more of the following high technology industries:  advanced computing, advanced materials, biotechnology, electronic device technology, and environmental technology.  For the purposes of the High Technology Tax Credit, R&D does not include market research, testing research, or quality control.  Participants may claim a B&O tax credit of up to $2 million per annum for qualified R&D activities performed in Washington.  This credit is most rewarding to companies with a significant emphasis on R&D.[v]

The tax incentive of 20 years—which had undergone few changes during its lifetime—came up for renewal again in the 2014 regular session, but failed to pass.  The credit will expire on January 1st, 2015.  Program participants may claim credit up to that point by filing their taxes multiple times during the year, allowing them to benefit from the incentive until the date it expires.  Strong concerns were voiced about the credit’s $22.9 million in tax relief in 2008 alone.  In particular, the credit became a target for state associations searching for a way to raise taxes for education in the wake of the McCleary vs. Washington State ruling.[vi]

At the same time, the tax credit’s success was used to support both its renewal and its expiration; proponents wanted to build upon the credit’s success to further develop the industry, while their opponents saw that very success as evidence that the credit’s 1994 goal has been accomplished.[vii]


The failure to renew this tax credit will have broad implications across the high tech sector, from large, well-established companies to young, growing ones.  Two general tax credits remain for these businesses, the High Technology Sales & Use Tax Deferral/Waiver (RCW 82.63) and the Biotechnology & Medical Device Manufacturing Sales & Use Tax Deferral/Waiver (RCW 82.75 and 82.32.645), but the High Technology Sales & Use Tax Deferral portion that pertains to R&D (RCW 82.63.030) expires with the B&O tax credit in 2015.

The next opportunity to renew or restructure the credit will be during the legislature’s 2015 regular session.  The most obvious implication of this credit’s cancellation is its impact on R&D in the high technology sector.

Larger companies may avoid the increased tax burden by relocating R&D projects to states with more favorable tax structures, but the varying immediate costs of relocation will make this an individual assessment.  The tax credit’s $2 million cap makes it a lesser, but not insignificant, credit for large companies, and gives credence to the idea that such companies will not be willing to relocate R&D activities.  These businesses will also have to consider whether Washington State is the best location for new R&D activities.  The surprise failure of the tax credit will encourage a more aggressive legislative agenda for such companies, coupled with increased collaboration between companies in this arena, and the tax credit could very well be reinstituted in 2015.  In the mean time, companies cannot rely on the credit’s reintroduction, and new growth in R&D in Washington State’s high tech sector will be limited as a result.

The loss of this tax credit is likely to most noticeably affect small and young businesses in the sector for which the credit is a significant sum.  The High Technology Tax Credit was a boon to such, encouraging innovation in what has become one of the technology capitols of the world.  Without the tax credit’s support, small companies will have to reassess their emphasis on R&D in the short term.  For companies where the cost of relocating eligible R&D activities is relatively low—such as small software companies—moving operations to a state with a more beneficial tax structure may be desirable.  More concerning for participants in the high tech program is the 53% survival rate of high tech participants compared with the 39% survival rate of non-participants[viii].  The dissolution of the high tech tax credit seriously threatens the survivability of small, young participants and will also discourage R&D-heavy startups from locating in Washington State.


Year U.S. High Tech Washington Participants Washington Non-Participants
2006 2.8 3.9 6.3
2007 6.5 4 4.8
2008 2 3.9 3.5
2009 -2.7 -0.6 2.7
2010 0.1 5.1 1.4
2011 2.6 3.2 5.4
2012 2.2 4 1.6
 Source: High Technology Study 2013


The effects of eliminating the high tech tax credit on job growth are less clear.  From 2006 to 2012, percent job growth among participants and non-participants was mixed[ix].  The economic recession affected both participants and non-participants, but to varying degrees.  High tech companies in Washington have provided job grown in fairly consistent excess of U.S. high tech job growth in this time period, with the exception of 2007.

Tax incentive participants are also overwhelmingly likely to be young companies; 46.4% of program participants from 1995-2012 were less than one year old at the time of their first use of the program[x].  The program emphasizes assisting young companies to develop them into mature, job-bearing companies.  The immaturity of participant companies further explains the puzzling job growth statistics above:  participants self-select by company age, a characteristic that, when combined with emphasis on R&D, suggests a company with relatively low short-term growth.

Policy Goals

The policy goals for a restructured or renewed high tech tax credit derive from the 1994 goals that resulted in the original tax credit.  At the same time, the composition of Washington State’s high tech sector has changed significantly since then.  With more and larger established high tech corporations, the legislature is faced with a different set of challenges.

At first glance, the presence of mature high technology companies would seem to shift the emphasis of new legislation from nurturing young companies to supporting the R&D of the more advanced and capable mature companies.  The credit’s original goal, however, remains salient.  While large, established companies have become an important part of Washington’s high technology sector, there are significant advantages to maintaining a rich corporate ecology of young, small companies.  Giving small, research-heavy companies the chance to see their ideas develop into robust, mature businesses gives the state the chance to see long-term job growth in each participating company.  Indeed, the $2 million cap on the original credit is evidence of the State’s desire to support fledgling companies.

The removal of the B&O high tech tax credit and sales tax deferral programs is a signal of the legislature’s imperative to free up funding in the aftermath of the McLeary vs. Washington State decision rather than their abandonment of job creation in the high tech sector.  The main hurdle for restructuring the B&O high tech tax credit is finding the balance between fostering job growth and shifting the tax burden to other sectors.

Another goal of the state legislature is to efficiently allocate any tax credit allotted to the sector.  In the past, this was done by integrating a cap on the tax credit with a function that relates a company’s R&D spending to its taxable income.  In this way, small companies with high R&D relative to their taxable income benefit comparatively more from the tax credit.  However, since the B&O tax is a gross receipts tax, only companies that have positive gross receipts are eligible for the credit.  The companies that need support the most, those with high R&D and negative gross receipts, cannot benefit from the current incarnation of the High Technology B&O Tax Credit.  Addressing this issue while remaining within the bounds of Washington’s B&O tax structure is a difficult task.

Together, the policy goals of the state legislature are:  to foster innovation and development in the high technology sector, to foster both short and long-term job growth in the high technology sector, to efficiently allocate tax credits with the previous goals in mind, and to provide such support in a way that does not create an unfair tax burden on other sectors and taxpayers.

Policy Options

Policy options for this issue spring from the confluence of legislator concerns and the continued need for innovation in and maturation of the high technology sector in Washington State.  The need to create funding for education was a major factor in the legislature’s failure to renew the existing B&O high tech tax credit, and the shifting of the tax burden for any restructured high tech tax credit will be a main concern.  With Governor Inslee’s recent commitment to putting a carbon pricing scheme before the state legislature, an obvious target for funding is any additional revenue generated from carbon pricing.   This would resolve the funding issue in a way that does not create an additional, unfair tax burden on other taxpayers.

An interesting option for the state legislature that pursues both goals of efficient allocation and job growth in the high technology sector is to issue tradable R&D tax credits.  Following the basic structure of the existing B&O tax credit, a company participating in eligible R&D would be issued tax credits equal to $35,000 that could be applied up to but not in excess of that company’s B&O liability.  The $35,000 credit is based on the average total yearly tax credit divided by the number of participating companies in 2012.  By issuing credits of $35,000 to 600 companies engaging in eligible R&D, the state can effectively amplify the original credit’s effect of imparting comparatively more value to small, R&D heavy companies than large, R&D light companies.  A tradable system also opens up benefits to R&D heavy companies that have not yet incurred B&O taxes.  For these companies, the R&D credit can be sold at slightly less than face value to companies that do have B&O tax liability.

Company A in the table below, for example, is credited $35,000 towards its B&O tax liability.  This company is not yet mature enough to have reached positive gross receipts, and so has no B&O tax obligations.  While it cannot apply this credit to its B&O tax, Company A would be able to sell this credit to, for example, Company B.  Company B is a large, research-heavy company with a $95,000 B&O liability in excess of its $35,000.  Company B buys the tax credits from Company A at 90% of the value of the credits, simultaneously reducing its B&O burden and providing Company A with additional money.

Company A Company B
B&O Liability $0 $120,000
B&O Liability After Credit $0 $95,000
Credit Sold $35,000 $0
Credit Bought at %90 $0 $31,500
Total Credit Value $31,000 $66,500


This scheme produces an allocation of tax credits that is efficient and equitable.  Based on the number of companies participating in the B&O tax credit program as of 2012 and the average tax credit given from 1995 to 2012, providing $35,000 in credits to companies with eligible R&D would cost in the neighborhood of $22,000,000.

The advantage of a tradable B&O high technology tax credit is that it allows companies that would not otherwise be receiving a large tax credit to sell that remaining credit to another company that was not able to meet its credit cap with the $35,000 credit alone.  This system emphasizes small, research-heavy companies, mirroring the goals of the original 1994 law.  A price floor would provide further benefit to small companies, ensuring that they can extract a high price as they sell their remaining tax credit to other companies and preventing a race to the lowest price point.

The specifics of the tradable tax credit outlined above can be altered to emphasize different legislative goals.  Providing a tradable credit of $100,000 but to fewer companies, for example, shifts the focus to job creation.  Reducing the total value of the credits shifts the focus to budgetary constraints.

Aside from restructuring the credit, the state can also choose to renew the existing B&O credit.  Without addressing the budgetary issues that led to the credit’s cancellation, however, such renewal is unlikely to happen.


The state’s failure to renew the High Technology B&O Tax Credit is more indicative of the state’s goal of freeing up funding for education in response to the McCleary vs. Washington State decision than it is a referendum on the goal of fostering job growth and maturation in Washington’s high tech industry.  The consequences of losing this tax credit are:  small, R&D heavy companies are less likely to reach maturity; new R&D heavy startups are less likely to grow; large companies are less likely to pursue new R&D projects in state; and industry job growth as a whole will be stunted.

The key to addressing the legislature’s concerns lies in funding the program.  If a comprehensive carbon pricing scheme can be passed, then revenue from such a program can conceivably be directed to the state’s high tech sector.  A tradable B&O tax credit for eligible R&D gives the state more control over exactly how much money is allocated to the program, and gives the sector more opportunities to benefit.


[i]  “The Birth of a Bill.”  Heller Ehrman White & McAuliffe, 12 Sept. 2011. Web. 15 May 2014.  Originally written 1994-95.

[ii]  Ranken, Tom. “Washington’s High Tech Tax Laws.” . Washington Clean Technology Alliance, 22 Aug. 2011. Web. 15 May 2014.

[iii]  Mittge, Brian. “Extending High-Tech R&D Tax Credits Will Keep State Strong.”  Association of Washington Business, 20 Jan. 2014. Web. 15 May 2014.

[iv]  Oline, Kathy. “High Technology Study 2013.” State of Washington, Department of Revenue, 2 Dec. 2013. Web. 15 May 2014.

[v]  Oline, Kathy. Ibid.

[vi]  Romano, Benjamin. “Washington Lawmakers Ax Life Sciences Fund, Tech Incentives.”  Xconomy, Inc., 27 Mar. 2014. Web. 15 May 2014.

[vii]  Romano, Benjamin. Ibid.

[viii]  Oline, Kathy. Ibid.

[ix]  Oline, Kathy. Ibid.

[x]  Oline, Kathy. Ibid.