WA Tech Group Happy to Trade R&D Incentive for Education, for Now

Despite failing to renew high-technology tax incentives for research and development, the $38.2 billion two-year budget passed by Washington lawmakers this week represents “an amazing compromise,” according to the head of the state’s tech trade group.

“A lot of the things that need to be done are being addressed,” says Michael Schutzler, CEO of the Washington Technology Industry Association. That includes “everything from transportation to school funding to a lot of infrastructure that we need as a society in order for this to be a healthy, growing region for the next couple of decades.”

The state budget, which spends $4.4 billion more than the two-year budget ending today, was balanced in part with revenue from failing to renew the tech industry’s longest-standing tax incentives. That doesn’t bother Schutzler—at least for now—given that the budget provides things like funding to train more computer science teachers at the K-12 level.

It also cuts university tuition, increases teacher pay, reduces elementary school class sizes, and devotes other funding to shore up education—though it falls short of the constitutional mandate to adequately fund K-12 education and should be rejected by the state Supreme Court, according to the superintendent of public instruction, Randy Dorn.

Schutzler says that the lack of computer science education in most Washington high schools means “nine out of 10 kids in our school systems do not get access to the industry that is producing most of the jobs in the state. That’s just wrong.”

The funding for educators is “a first step,” he says.

Schutzler.

Schutzler.

“We’ve still got a long way to go to fix the computer science pipeline in our state, but that was a huge win for us, and we’re super excited about it,” Schutzler says. “The only way we’re going to get stuff like that over the finish line, frankly, is if the industry is willing to participate in the compromises associated with this.”

The tech industry’s principal tax incentives, in effect since 1995, gave businesses in advanced computing, advanced materials, biotechnology, electronic devices, and environmental technology, a credit against their business and occupation taxes for research and development expenses. They also allowed sales taxes on R&D equipment and facilities to be deferred. The incentives expired on Jan. 1.

As a result, budget writers assume $72 million in revenue over the next two years that would otherwise have been claimed as tax credits, according to an overview of the budget (PDF). The repeal of a sales tax exemption for software manufacturing machinery and equipment is expected to keep another $52.2 million in state coffers.

The state’s life sciences industry is also paying a price: the Life Sciences Discovery Fund was effectively shuttered, shifting $11 million to the general fund in the next biennium, barring any last-minute vetoes by Gov. Jay Inslee, who was expected to sign the budget Tuesday evening.

Meanwhile, a tax exemption for server equipment in data centers, expected to save companies that build the infrastructure of the cloud computing era $12.5 million over the next two years, is included in the budget.

And there could be more to come in the state’s capital spending budget, which is expected any minute now. Specifically, Schutzler says he is “very hopeful” that it will include state funding for a new computer science building at the University of Washington. Private donations for that project are already coming in, kicked off by a $10 million pledge from Microsoft earlier this month.

While he’s a fan of the overall budget compromise, Schutzler calls the lack of an R&D tax credit “silly,” noting that tech-heavy Washington is now one of only six states without the incentive.

“I think in the near term, it’s something we can live with, but longer-term for the state, I think it needs it to be competitive,” he says.

In his opinion, these kinds of tradeoffs stem from an antiquated, regressive tax system in need of an overhaul that didn’t happen this time around.

“Does the state want to build a system that has world-class education and produces the higher education programs that create the talent that we need as an industry, or does the state want to incentivize the industry to continue to build more jobs here, which it has for two out of every three jobs over the last 20 years? You want both, but our tax code doesn’t allow for that,” Schutzler says.

Benjamin Romano is editor of Xconomy Seattle. Email him at bromano [at] xconomy.com. Follow @bromano

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