Let The Sun Set On An Ineffective Tax Break For High-Tech Businesses

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Let The Sun Set On An Ineffective Tax Break For High-Tech Businesses

By - January 17, 2014

By allowing a wasteful and ineffective tax break for high-tech firms to expire on schedule at the end of 2014, lawmakers can preserve more than $60 million in funding over the next two years for schools, health care, and other investments that create jobs and help build a strong state economy.

However, that may not happen as lawmakers are considering a bill, House Bill 1303, that would extend the tax preference for another 20 years. It will get a public hearing later today in the House Committee on Technology & Economic Development. To preserve funding for key public priorities, the legislature should shelve HB 1303 and allow the wasteful high-tech tax break to expire as planned.

A Proven Failure

Policymakers enacted the Business and Occupation (B&O) tax credit for certain high-tech research and development activities in 1994. It currently costs about $60 million per two-year budget cycle. Although the credit was intended to create high-quality jobs in Washington state, a 2012 audit shows it to be a colossal failure. The Joint Legislative Audit and Review Committee (JLARC) found that high-tech employment in Washington state increased by less than 1 percent between 1995 and 2012 as a result of the credit. The few jobs that were created came at an enormous cost to the state –about $45,000 per job created.

Based on JLARC’s audit, a citizen commission  that reviews state tax breaks recommended that the credit be allowed to expire at the end of 2014.

A 2013 study from the State Department of Revenue also showed no meaningful difference in employment growth between high-tech firms that received the B&O credit and those that didn’t. Among firms that received the tax break, employment grew at an average annual rate of 2.9 percent between 2006 and 2012, versus 3 percent among those that did not receive the break.

Justifications Don’t Hold Water

Supporters of the high-tech industry rely on flawed arguments to defend the tax break. They argue that high-tech firms don’t receive their just rewards from research and development investments, since other industries benefit from those investments too by adopting the technology. The tax break, they argue, compensates the high-tech sector for these indirect benefits enjoyed be others.

That’s a rather flimsy straw man. Few would argue a math program that consistently fails to improve math scores among high-school students ought to be preserved simply because it benefits math tutors. The same logic applies to the high-tech B&O credit, which has roundly failed to create high-tech jobs in Washington state, its primary purpose.

The bottom line is that the $60 million per budget cycle currently devoted to the high-tech B&O credit would be better spent on education, health care, jobs training, or other investments with a much larger bang for the buck.

Policymakers should take no further action on HB 1303; they should simply allow the sun to set on the high-tech tax break.

About the author

Andy specializes in state budget and tax policy. Since joining the Budget & Policy Center in 2009, he has served on a Legislative Task Force on Tax Preference Reform and has conducted numerous analyses of Washington state’s tax code.

Read more about Andy