Why the Legislature Failed To Renew Hi-Tech Tax Credits: A Meeting with House Finance Committee Chair Reuven Carlyle

By Eric Viola, WCTA Public Policy Analyst

June 6, 2014 (Seattle, WA) – State Representative Reuven Carlyle (D-36th district) joined the members of the WCTA’s Government Affairs Committee at our meeting on Tuesday, June 2, 2014.

The heart of the discussion was the Legislature’s failure to renew the High Tech R&D tax programs (the B&O Tax Credit and the Sales/Use Tax Deferral), and Rep. Carlyle’s personal exasperation with the tax system. As Chair of the House Finance Committee, Reuven has made his personal preference—broad, low taxes that are evenly applied without excessive exemptions—known repeatedly to the community.

Washington State Representative Reuven Carlyle
Reuven Carlyle, Washington State House Finance Committee Chair

For the past three years, Rep. Carlyle has tried to retool the two programs to reduce their cost to the State and to focus the benefits on young companies that stand to gain the most value from the least amount of money. By setting an eligibility cap on company revenue for different levels of credit value, Rep. Carlyle hoped to retain the job creation value of the program. Essentially, he designed a progressive incentive structure, reducing the ratio of credit to R&D expenditure as company revenue increased. The change in tax revenue would net more to the state, and that money could go directly to fund additional training in electrical, mechanical, and software engineering; the change would simultaneously encourage job creation and develop the state labor pool to fill those jobs.

The Legislature and industry players, however, failed to achieve a compromise. The programs are slated to expire on January 1, 2015.

“Washington State’s tax system is totally inefficient,” Rep. Carlyle began, “people feel like they’re being nickel-and-dimed because of a myriad of different taxes and fees, including the B&O tax.” By spreading out the tax revenue that most states get through an income tax across sales, use, liquor, and gas taxes—and many, many others—Washington has created an incredibly complex network of taxes, he explained. The state has implemented a complex web of roughly 650 tax exemptions and incentives—more than any other state in the nation—that hamstring operating efficiency and create leakages at every turn.

What is the implication of such an inefficient revenue structure? For one, says Rep. Carlyle, State spending suffers. In the landmark McCleary vs. Washington decision, the State Supreme Court ruled that Washington has not been meeting its “paramount duty” of providing basic education. It is still unclear how the legislature will meet that requirement, but the Court has required action.

Rep. Carlyle argued for robust data-driven analysis determining causality in tax incentives. As far as the High Tech tax incentive programs are concerned, that entails determining causal links between incremental economic development and high tech R&D, which he believes have not been fully established. Rep. Carlyle expressed support and optimism for economic incentive programs that better demonstrated proof of effectiveness, and encouraged the committee to review the High Tech incentive program’s public data to better understand specific company benefit by size in the current system.

Rep. Carlyle sees Washington State developing as a true driver of the tech industry, but he believes that programs other than the R&D tax incentives can be even more effective. Specifically, Carlyle asserted that the state could provide more value to early-stage tech companies by becoming an early customer than it can through traditional tax incentives.   In Carlyle’s vision, the state would provide a laboratory of access to public agencies, including proof of concept support and early stage capital formation support via programs such as the Life Science Discovery Fund.

Rep. Carlyle hopes that the State Legislature and industry leaders can achieve a compromise that can more effectively develop new jobs—and help meet the State’s pressing financial obligations.

Based on his experience thus far, this will be a difficult task. Rep. Carlyle closed the meeting by reiterating his desire to continue to work with the industry, especially with regards to concerns over sales tax on constructing new R&D facilities. He plans to meet 2015 and the R&D incentive programs’ expiration with enthusiasm.

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