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Brier Dudley's blog

Brier Dudley offers a critical look at technology and business issues affecting the Northwest.

January 31, 2011 at 10:06 AM

Time to review tech tax breaks?

(Today’s column …)

With all the lingering angst over bailouts for banks and carmakers, you’d think we’d be taking a closer look at stimulus funds for high-tech companies.

Especially since government isn’t recovering from the downturn as quickly as industry, especially in Washington state.

Tech companies have turned the corner. They’re growing, hiring and reporting record profits.

It seems like a good time to ease up on their tax breaks and shift some of that money to education and science that fuel the industry’s future growth.

But just the opposite is happening.

President Obama primed the pump last week, when he talked about how important it is for the United States to be innovative.

The White House is following up Monday by launching “Startup America,” a series of events promoting new initiatives to “help encourage private sector investment in job-creating startups” and accelerate research.

Encouraging innovation and research is great and I can’t wait to hear what’s being offered. Especially if it helps entrepreneurs and scientists create amazing new things, and doesn’t just pad the profits of the richest companies in the world and their investors.

Are more incentives needed to encourage companies like Microsoft, Intel, Apple and Google to innovate? Can we afford to give them more breaks and simultaneously spend more on education?

They’re already seeing benefits from a federal tax credit for research and development activities, renewed by Congress and signed by Obama Dec. 17. Microsoft and F5 Networks recently said the credit boosted their latest earnings even higher.

They also benefit from R&D tax breaks in Washington state. Those breaks will save tech companies $145.7 million in the two-year period ending in July, according to a state commission that reviews the 500 odd tax breaks in Washington.

That’s in addition to a business-and-occupation tax credit worth up to $2 million a year for tech companies.

These breaks may encourage tech companies to locate in Washington and develop products here, but after a while it gets silly. They’re pocket change for established companies driven by competitors and customers to innovate and develop new products as fast as they possibly can.

State budget crisis

Meanwhile, Washington is in a crisis. Gov. Chris Gregoire is asking lawmakers to slash education, health care and pensions and raise user fees to keep the state afloat until the rising tide reaches Olympia.

The result will be the public gets less and pays more, while the state isn’t touching the corporate tax breaks, especially not for tech. It reminds me of a school principal who makes the kindergartners move chairs and clean up after an assembly, because the fourth- and fifth-graders might object.

Lawmakers are in a really tough spot with the budget. They have found time to consider extending the R&D tax break, though. That deferral/exemption doesn’t expire until 2015, but employers said it will help them plan and have more certainty if the tax is extended to 2035, according to the extension bill’s sponsor, Rep. Ed Orcutt, a Republican from Kalama.

My conversation with Orcutt about this was awkward, especially when I asked if the exemption might be capped somehow, given the budget crisis.

“I don’t think there’s a need to cap it,” he said. “It’s been working. If we extend it, it will continue to work.”

Deferral is exemption

If I were a beneficiary, I’d want the program extended.

Starting in 1994, the state offered to defer sales taxes on investments in research and development activities. Companies were supposed to eventually pay the taxes. But then the law was changed so they don’t ever have to pay, as long as the investments continue to be used for R&D. That means, though the policy is still called a deferral, it’s basically an exemption.

Microsoft used this program to defer $34 million worth of sales taxes in 2009. To put that in perspective, the company paid $1.9 billion toward income taxes in the past three months. During that same quarter, Microsoft had sales of $19.95 billion and net profit of $6.6 billion. It spent $2.1 billion on R&D in the quarter, when its overall tax rate was 22 percent, down from 25 percent the year before.

Another $29 million in deferrals in 2009 were claimed by Immunex. It was sold in 2002 to Amgen, which continues to operate in Seattle but employs less than half as many people as Immunex did at its peak.

Washington’s tax breaks are periodically reviewed to see if they’re still a good deal for the public. The last report came out in 2008, in the depths of the downturn. The next one was due from the Department of Revenue in 2012, but the agency is asking to push it back to 2014. The 2008 report said business incentives saved companies $3.9 billion during the 2007-2009 biennium.

Public interest is also served by the citizens commission that reviews the performance of tax breaks. But it’s not scheduled to look at the tech sales-tax break until 2012 (by which time it may be extended to 2035).

Moratorium idea

I’m not the only one grumbling about these breaks.

Dick Nelson, a former state representative retired on Phinney Ridge, started analyzing them after Microsoft opposed last year’s state income-tax initiative.

Nelson thinks there should be a means test, similar to asking welfare or public-health recipients to prove they need the assistance.

If “there’s a means test for individuals, for people that don’t have much means, then there should be one for big corporations that have billions sitting in the bank,” he said.

Nelson sees an opportunity for Washington to show national leadership by modifying its incentives, instead of trying to keep up with other states’ handouts.

But that’s unlikely when reducing incentives for a particular industry is equated with increasing taxes on the people, which requires a two-thirds majority vote in the Legislature.

Nelson is talking to labor leaders, who have floated the idea of a moratorium on tax breaks, and human-services groups about how to proceed. They could end up going the Tim Eyman route.

“It may be that an initiative, a ballot measure from the public … is the only way to pursue these,” he said.

Comments | Topics: Education, Enterprise, Entrepreneurs

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