Cancelling Washington R&D Incentives Will Erase Success

Published on Xconomy, August 5, 2014.  Written by Tom Ranken (WCTA President) and  Eric Viola (WCTA Public Policy Analyst).  The WCTA board voted unanimously to support re-authorization of the program in its January 2014 meeting.

Tom Ranken
Tom Ranken

Washington state’s principal high tech innovation tax incentives are set to expire on January 1. Adopted in 1994, the programs removed large tax barriers to performing new research and development activities in Washington. They have been counted on by the high tech sector for twenty years, providing early boosts for young, innovative companies, and high-value jobs for the state.

Before the programs, Washington tax law was punitive to R&D growth—and the job growth that goes with it. Building a $10 million R&D facility, for example, would incur more than $1 million in tax liability. Other states offered tax breaks and even helped pay for new facilities outright, banking that such investments would pay dividends in the form of high-paying jobs for the state. Our state has an unusual constitutional prohibition against the lending of state credit, which has severely limited our ability to compete with other states for business growth. The R&D tax credits were a legal means of addressing a small portion of that problem.

In the coming years, the state budget is going to get even more challenging. In 2012, the state Supreme Court ruled that Washington State had not met its “paramount duty” of making “ample provision for the education of all children.” It is not yet clear what the budget impact of that decision will be, but it is expected to require large additions to the education budget. The R&D incentives, painted as wastefully throwing millions of state dollars at established companies, made an easy target.

Eric Viola
Eric Viola

Do the programs really create jobs? The state’s research (PDF) shows inconsistent results over the past seven years. The research is almost entirely drawn from the Great Recession. With raging volatility surrounding it, the high tech sector was hit hard.

The data for 2012, when the state had gotten its head above water, reveals the true value of these programs.

In 2012, job growth among companies receiving the R&D tax incentives was 4 percent—double the national high tech sector rate and far outstripping the 1.6 percent rate of Washington companies that didn’t use the incentives. Executives at young, growing cleantech companies like 3Tier and UniEnergy Technologies have been quite clear that the people, equipment, and facilities they’ve invested in under this program have been critical to their scaling up.

At the same time, that job growth stayed in state: 86 percent of new employees hired by companies receiving the incentives were Washington residents, compared to 67 percent in 2008. And their survival rate was 53 percent, compared to less than 39 percent for those that did not get incentives. Washington ranked third in patents per capita in 2012, up from seventh at the program’s inception. Washington’s average annual growth in high tech patents from the same time period is 8 percent. The next-highest state is California, with 6.4 percent annual growth.

The 2013 Department of Revenue study concluded that, compared to other states, Washington’s growth in the high tech industry was competitive without the incentives. But unsurprisingly, adding the R&D incentives improved Washington’s rank. The data is in strong, if not unanimous, support of the state’s high tech R&D incentives.

But if the data is strong, why are these programs set to perish on January 1?

The companies that benefitted the most from these programs were the worst equipped to protect them. Small, young, innovative companies for which the limited state funds had the greatest impact simply couldn’t afford to lobby the legislature. And so, on January 1, the small startups and labs that benefitted the most from the R&D incentives will get just a little bit smaller.

The Washington Clean Tech Alliance’s inaugural showcase event earlier this summer revealed the robust growth of R&D under the current system. Prominent local job creators like Boeing and Alaska Airlines were in attendance, bolstered by the innovation and potential represented by the sheer number of young, R&D-heavy companies that presented their research at the event. Whether the achievements made will remain salient without continued incentives will be seen in the coming months as small innovators prepare to cut back R&D spending, including new project development, construction, and research positions.

We believe, ultimately, that an important part of the solution to our state’s budget challenges is the creation of new jobs; it doesn’t make sense to cut a program engineered specifically to meet that goal.

Follow Tom Ranken on Twitter at @jthomasranken.