Should state grant targeted tax breaks for biotechnology firms?

From Newslink, V7. N2, Winter 2003 During the past five years, the Massachusetts biotechnology industry has grown at an annual rate of 10 percent, representing half of all industrial job growth in the Commonwealth. The industry currently includes 280 firms that employ approximately 30,000 employees. Companies that call Massachusetts home are responsible for eight percent of the drugs now in the world’s pipeline. The biotech industry’s track record in attracting venture capital is impressive – drawing 18 percent of the state’s venture capital investment. Given its skilled workers and its top universities and hospitals, Massachusetts will continue to attract cutting edge life science firms. Last year, Switzerland’s Novartis AG announced plans to establish its global research center in Cambridge. Nevertheless, as the industry matures, competition from other regions is intensifying. The Bay State’s main technology competitor states – California and North Carolina – continue to attract not only research centers but also manufacturing facilities. That, according to the Massachusetts Biotechnology Council, spells trouble for Massachusetts. Industry leaders say it’s time for the Bay State to step up to the plate and compete actively for the future job growth promised by the breathtaking innovation taking place. Having a vibrant cluster of universities, hospitals and venture capital firms is not enough. The Commonwealth must be not only a vigorous cheerleader but also a vigilant steward, offering predictable and, preferably, low taxes, a flexible regulatory environment and, if possible, direct and indirect public investment. “If the state’s political, business and academic leadership does not respond, the Massachusetts biotech industry will continue to grow, but it will represent an ever diminishing share of biotech jobs,” writes the Mass Biotechnology Council, which coauthored the report, MassBiotech 2010, with the Boston Consulting Group. “Alternatively, if the state mounts a concerted effort now, by 2010 the industry could expand its share of employment, create nearly 100,000 additional state jobs and raise more than $1 billion in cumulative personal income tax revenues.” The Biotechnology Council believes that more than two-thirds of that hoped-for job growth will be in service and support industries. But for that to happen, Massachusetts must build from its strong base in research and move “down the value chain” into other activities, such as development and manufacturing. In fact, the future of the research sector depends on the ability to co-locate research jobs with manufacturing. “Not only do downstream jobs allow the state to spread the benefits of biotech employment to a far broader segment of society, they also serve as an important anchor for keeping upstream jobs in the state,” says the report. The industry clearly isn’t sitting still. In December it launched a legislative effort to obtain tax incentives that could specifically help the biotech sector. Industry leaders are calling on the state to make research and development and investment tax credits as well as the "single-sales" factor permanent. Passed in 1995, the single sales factor changed the way multi-state corporations’ income is subjected to the corporate income tax. The following year, the benefits of the single sales factor were extended to include mutual fund companies. The Biotechnology Council is also calling for the establishment of a novel idea: the creation of a state market in R&D and investment tax credits which would allow start-up companies to sell their credits to profitable companies that can use them to defray taxes. The push for favorable tax treatment comes at an inopportune time, however. Not only is the state budget facing a supposed shortfall, but elected officials are reopening the debate over the value of most of the business tax breaks it passed in the 1990s, including the single sales factor and the investment tax credit. “We’re certainly going to justify with a fine toothed comb any tax credit at this stage in the game,” one legislator told the Boston Herald recently. But there are other reasons that targeted tax cuts don’t make sense. A 1995 STAMP analysis by BHI found that such targeted tax cuts would not create many of the jobs promised by supporters. The reason is that business tax breaks for manufacturers spur firms to substitute capital goods – plant, equipment and other fixed assets – for workers. By stimulating investment, these tax breaks provide long-run benefits to the economy but not benefits of the kind that can be sold politically as job-creating. For political as well as economic reasons, sound tax policy requires that tax cuts be applied to all firms – firms that provide services as well as manufactured goods – not just to those with the strongest political influence. Cutting taxes on all corporations would be a better way to increase jobs, payrolls and capital stock. The push for business-specific tax cuts, as opposed to broad-based ones (i.e. cutting the personal income tax rate) is drawing skepticism even among voters who tend to support business. This year’s BHI State of the Household Survey found that taxpayers are opposed to specific tax cuts for the biotech industry. About 43% oppose while only 31% favor; 26% offered no opinion. -30-

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