Before Washington Gov. Jay Inslee and state legislators can even think about renewing or expanding research and development incentives for innovation industries, they need to find a way to fill a hole in the state budget on the order of $5 billion over the next four years.
But in an interview with Xconomy on Friday, Inslee, a Democrat who campaigned on combating climate change, hinted at a potential solution in which a state cap-and-trade system to limit greenhouse gas emissions could help raise revenues to adequately fund K-12 education, as the Legislature has been ordered to do by the state Supreme Court in its McCleary decision.
“If you have to raise revenues, why not do it in a way that’s going to make your air healthier and reduce the threats of asthma and ocean acidification, and there is a way to do that,” Inslee told Xconomy after addressing the 2014 Governor’s Life Science Summit. “So I think legislators—over time, as they start to come to terms with how large the fiscal challenge is—may open their minds to, you know, solving two problems with one solution.”
The upcoming election, in which every state House seat and about half of the Senate is up for grabs, is obviously a wild card. Inslee acknowledged that passing carbon regulations of any kind would be much easier if Democrats retained control of the House and took back the state Senate.
He was cautious about revealing any specific strategies for resurrecting the state’s 20-year-old research and development tax credit and sales tax deferral, a top priority for technology companies across the state that legislators failed to renew. (It expires Jan. 1, 2015.) Likewise, he expressed strong support for the Life Sciences Discovery Fund, which he protected from defunding earlier this year with a veto, but could not make any guarantees.
“People know that I think investment in R&D is critical to our future and is one of the best investments we can make, so we’re going to look at that,” Inslee said. “But again, it has to be in a context of being able to raise revenue—total, from the total package—to go into schools, because that’s a necessity. We’re under court order to do that. It’s a judicial requirement. And more importantly, it’s a requirement for our grandkids and our kids.”
Inslee began his address to the life sciences meeting, which drew about 700 people, on a very personal note.
“Let’s be clear about what this industry produces. It does not produce widgets. It does not produce aluminum. It produces productive life itself,” said Inslee, whose father, Frank Inslee, passed away last week at 88. “This is not an abstraction to me.”
Inslee said his father enjoyed a vibrant, productive life in his final years, despite illness, because “somebody was optimistic enough to create some of these medicines that kept him going. I want to thank you for your industry that gave my family some extra few years of great life with my Dad.”
Inslee said he wants Washington to become “the global leader in life science innovation and healthcare delivery by the year 2025,” echoing aspirations of leaders of the Washington Biotechnology and Biomedical Association (WBBA), which is marking its 25th year.
But there’s a mixed picture for biotech in Washington state today. Chris Rivera, WBBA president and CEO, said there have been more than 50 investments, partnership, or collaboration deals involving Washington companies thus far this year, bringing some $1.1 billion to the state, compared with about $800 million in 2013. (Much of that capital has flowed to one company: Juno Therapeutics, which quickly amassed $310 million in funding starting late last year.) There were a total of 34,200 direct jobs in the state’s life sciences industry in 2013, up more than 3,300 jobs since 2007.
But the Seattle biotech sector’s anchor tenant, Amgen, is leaving town. Novo Nordisk is changing its Seattle-area focus. And Washington’s financial support for life sciences, already modest compared to the likes of Massachusetts, California, New York, and Texas, is precarious thanks to the R&D tax credit expiration, and attacks on the Life Sciences Discovery Fund as lawmakers seek revenue for education anywhere they can.
Inslee broke the bad news on the state’s coming budget challenge: There’s a structural deficit of more than $1 billion, despite the economic recovery, he said. And legislators have to find an additional $4 billion over the next four years to fund basic education, as mandated by the constitution and state Supreme Court—and that figure does not include any funds for early learning or higher education.
“Our state revenues are growing, but at a much slower pace than in previous [economic] recoveries,” Inslee said, adding that revenues are not keeping pace with the demands of an aging population and increasing poverty “occurring because of the gross inequality that this new economy is creating.”
The state’s heavy reliance on sales taxes are insufficient given that more consumer spending has moved online and toward services that don’t incur as much sales tax. “Meanwhile, tax cuts enacted over the years have dramatically altered the ability of our revenue system to support our educational system in this state,” Inslee said.
Asked whether the state needs to fundamentally alter its tax system, Inslee said all options are on the table and suggested closing tax loopholes. But that’s unlikely to generate the kind of revenue needed to meet the budget shortfall, let alone pay for other priorities like transportation and infrastructure.
When Xconomy raised the issue of carbon regulation, Inslee called it an opportunity. “We have a way, with a carbon pollution cap, that could in a non-injurious way produce hundreds of millions of dollars of revenue that could be used for investments in a variety of ways, that the legislature could decide,” he said.
In some competitive state legislative races, Republicans are attacking Democrats with ads suggesting carbon regulation will lead to increased energy prices.
While Inslee has not settled on whether a carbon tax or a cap-and-trade system would be a better fit for Washington’s economy and emissions reduction targets, he extolled the “clear advantages” of cap-and-trade, in which government sets an enforceable limit on emissions and companies better able to meet it can sell emissions permits to those that cannot. Inslee said he’s waiting for the report of an advisory committee, expected in December, to finalize his approach.
Here’s a transcript of the full Xconomy interview.
Xconomy: You talked about the research and development tax credit. Do you have a specific strategy for how that’s going to be renewed in the next legislative session?
Washington Gov. Jay Inslee: Well, we’re still developing that. So our budget is under review, so we can’t reveal any budgetary revelations at the moment. We’re looking at it in the context of how we’re going to fund education, and at the same time incentivize R&D, and both of those are very important. I have long believed that an R&D tax credit, properly targeted—if it’s properly targeted—can have a benefit to the state. So we’re looking at that, potentially how to target that, also in the context of, we’re going to have to raise some revenues to support education. So we’re going to have to do both to maintain the R&D approach to this.
So we’re looking at a variety of alternatives, and our budget is still under construction at the moment, but I do believe an R&D tax credit—again, if you target it to the proper targets, that [are]really going to incentivize investments—could make sense.
X: Other states, such as California, New York, Texas, and Massachusetts—the WBBA actually put out a long list of other states that have greater life sciences incentives than Washington at this point. Given the financial constraints imposed here by the McCleary decision, is there anything else Washington can do to be more competitive, specifically for life sciences companies?
JI: I believe that, first off, we’re going to need very significant investments, obviously, in education, and if we’re going to maintain support for our school children, to make sure we don’t have more homeless kids and more hungry kids and more sick kids, we’re going to have to make a substantial investment, which is going to require revenue. If we do that, than I think there is a place for targeted R&D, for the Life Sciences Discovery Fund, and you know, perhaps, other alternatives.
But again, I can’t make any clear statements about that because our whole budget is dependent on a thousand moving pieces and those are all under development.
I think people know that I think investment in R&D is critical to our future and is one of the best investments we can make, so we’re going to look at that. But again, it has to be in a context of being able to raise revenue—total, from the total package—to go into schools, because that’s a necessity. We’re under court order to do that. It’s a judicial requirement. And more importantly, it’s a requirement for our grandkids and our kids.
X: Given those constraints and needs, are there some fundamental changes in the state’s tax structure that you think need to be considered at this point?
JI: We’re considering a number of options to provide for our school children. That’s all I can tell you at the moment. We haven’t landed on any suggestions, except we have identified previously some loopholes that really are not economically productive, and just are not as important on the priority scale as our school children’s educations. STEM education, drop-out prevention, and early childhood education have to take priority over some of those loopholes, many of which are old and really are not producing economic growth.
X: Turning to the issue of climate change, I wonder if you see any chance of passing carbon regulation in Washington state if Republicans were to take control of the state House or keep the state Senate in the coming election?
JI: Yeah, I’m going to remain optimistic and diligent, because of a couple reasons: One, we’re now seeing the impacts with our own eyes, and that’s why people are, I believe, increasingly calling for people to stop denying the problem and start working in a bipartisan fashion toward a solution to the problem. So that’s happening. Second, there’s an opportunity.
There’s multiple challenges on the legislature, but one of which is to generate funds for transportation projects, for water projects, for schools. There’s multiple financial challenges, and you can address carbon pollution and the health effects of carbon pollution at the same time you’re raising dollars. We have a way, with a carbon pollution cap, that could in a non-injurious way produce hundreds of millions of dollars of revenue that could be used for investments in a variety of ways, that the legislature could decide.
I think that if we’re going to have to raise some revenues, it might make sense to have, you know, secondary benefits including improving the health of our children. If you have to raise revenues, why not do it in a way that’s going to make your air healthier and reduce the threats of asthma and ocean acidification, and there is a way to do that. So I think legislators—over time, as they start to come to terms with how large the fiscal challenge is—may open their minds to, you know, solving two problems with one solution.
So yes, I think that could be an eventual result. It would be a lot easier if we have more people elected to the Senate who will face up to the science and want to work in a solution-oriented way. That’s almost exclusively Democrats at the moment, but reality has a way of focusing the mind. And the reality is, legislators of either party, both parties, are going to have to face a really giant fiscal challenge, and they’re going to have to look for solutions, some of which will involve revenue. So why not take care of the health of our children at the same time? A carbon pollution system, a cap-and-trade system does exactly that.
X: Have you settled your mind yet on whether the more appropriate regulation method is a tax versus a cap-and-trade system for Washington state?
JI: I think there are clear advantages of a cap-and-trade system, one of which, it actually works. It limits carbon pollution. It has a legally enforceable restriction against pollution, which is our principal goal in this thing. So I think it has been proven to be more effective in actually limiting carbon pollution. It also uses the market rather than government dictating to the economy. It uses the market to decide where these investments should be made.
But we have a task force working on this, looking at this. They have not reported to me, so I’m not going to draw any total conclusions until we hear from them.
By the way, the advantage of a cap-and-trade system is we are seeing it work. It’s in operation in eight Northeast states. It’s in operation in England. And it has been very successful in both of its goals, which is to reduce carbon pollution, and, secondly, not hinder economic growth.
So, I think we have working models; we don’t have to be the first. We don’t have to invent the rocket to the moon. It’s already there. We just have to make sure it fits Washington state.
X: But does the cap-and-trade system solve the same sort of budgetary problems that a tax would?
JI: Yes. It can, yes, because if you want to set the cap at a level that decreases carbon pollution and has price impacts that are not astronomical, and not damaging to your economy, and that’s been done successfully in some of these other states and countries. And we are doing very sophisticated modeling of the economic impacts of them.
And, yes, a properly constructed program can raise hundreds of millions of dollars for the education of our children, for investment in water systems, irrigation and flood-control projects, transportation projects. That issue is something legislators—all of those—will be faced with. And I’m not going to dictate those, obviously, because we’re in a Democracy.
X: Do you think this election, either here in Washington or nationally, has the potential to send a meaningful message on climate?
JI: Oh, every election is, but there’s many, many issues. I think that’s less—I think the gubernatorial election sent a message on climate because you had one candidate two years ago who is optimistic about our state’s ability to develop a clean energy economy, one that was not. I think one can say that sent some message, because it was one of the first times in a gubernatorial race it actually had been made an issue by at least one of the candidates. So I think that was a message.
In the legislative races, it’s a little harder to say that because there are so many local issues. Different candidates have different personalities. It’s a little more difficult to say you can draw broad conclusions from legislative races.