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Published in Economic Development

State lawmakers mull restoration of R&D tax credit

BY Sunday, January 30, 2022 06:17pm

Michigan could restore a tax credit for companies that conduct research and development here, which supporters say would make the state more competitive for high-tech business investments.

Legislation under consideration in Lansing would allow companies to claim a 15-percent credit on the state’s corporate income tax on what they spend on R&D in Michigan. As written, the legislation would apply an R&D tax credit for the advanced automotive, semiconductor and life sciences industries.

House Bill 5601 sponsor Rep. Matt Hall, R-Portage, seeks to build on the bipartisan push that led to the passage of historic legislation late last year creating the $1 billion Strategic Outreach and Attraction Reserve Fund to assist major economic development projects in Michigan.

“We started the process of putting Michigan in a place to compete across the country for major manufacturing projects,” Hall said during a recent House Tax Policy Committee hearing.

“I’m hoping it (H.B. 5601) will be part of a second wave of legislation here that continues in that spirit of working together — putting politics aside — to put Michigan in the best place possible to land the jobs of tomorrow,” Hall said. “I’m hoping that we can continue to show that Michigan will do what it takes to compete and to win the jobs of the future and to bring the employers of the future to our state.”

The Michigan Economic Development Corp. backs at least the idea to restore an R&D tax credit that was eliminated a decade ago with several other incentives when the Legislature reworked the state’s business tax code under then-Gov. Rick Snyder.

While the MEDC does not yet support Hall’s bill as introduced, the agency welcomes the restoration of an R&D tax credit as another tool toward retaining and luring business investments.

“We at the MEDC realize the importance of an R&D tax credit to an extremely competitive landscape when it comes to economic development,” said Greg Bird, the MEDC’s managing director for legislative and external affairs who specifically cited luring automotive battery R&D investments to the state. “R&D would be another important tool in our toolbox that not only allows us to attract new industries and businesses to the state, but also helps retain the existing jobs and nearly $22.4 billion already being spent by businesses on R&D efforts here in the state.”

Competing with states

Top competing states in the Midwest — Illinois, Indiana and Ohio among them — and states that “we frequently compete with for jobs: Georgia, Texas, South Carolina,” all offer an R&D tax credit, Bird said. He cited a 2019 study by the National Bureau of Economic Research that found state-level R&D tax credits increase entrepreneurial activity by about 7 percent and drive up new business formation by 20 percent over 20 years.

A tax credit also would help to retain R&D talent in the state, Bird said. Michigan, with more than 116,000 jobs tied to R&D, has the fourth-largest engineering, design and development workforce in the U.S., with a concentration twice the national average, he said.

“At a time of rapidly increasing demand for engineering, design and development talent, Michigan has a strong position as a state with a robust talent pipeline with strong support for talent attraction and retention,” Bird said. “Retaining and growing R&D investments here in our state also assures that the talent stays here in Michigan.”

The MEDC and Gov. Gretchen Whitmer’s administration want to work with the Tax Policy Committee to “make sure that this will be an effective economic development tool that will help retain and attract jobs that we want to see here in the state of Michigan,” Bird said.

More than 30 states have an R&D tax credit, including neighboring states such as Indiana, which allows the same 15-percent credit that’s written into Hall’s legislation.

Elimination of the tax credit in Michigan “really put our industry in a much less competitive position relative to other major bioscience hubs across the country,” said Steve Rapundalo, CEO of MichBio, which represents the life sciences industry that employs about 40,000 people in the state and is “very, very R&D-intensive.”

“In the intervening years, it even has put us in a less competitive position relative to the Georgias and the Virginias and other states that have much smaller bioscience industries,” Rapundalo said.

‘First draft’

One concern about Hall’s bill is the potential effect on the state budget. As written, the bill would reduce state income tax revenue “by an unknown, but potentially very large, amount,” according to a House Fiscal Agency analysis.

In a scenario that uses National Science Foundation data showing $16 billion in R&D was spent in the transportation sector in Michigan in 2018, restoring the tax credit could reduce state revenues $500 million annually if just 20 percent of the investment qualified for a tax credit.

Acknowledging the effect on the budget, Hall said he expects to revise the bill to include a cap on the amount of R&D tax credits awarded annually. He called H.B. 5601 as written a “first draft” that will change as legislators and the administration work toward a final version.

“We’re going to cap it. There could be all sorts of different ways to do that,” he said. “There has to be some limit, whether it’s a limit to one company or whether it’s a total cap. Whatever it is, we’ll come up with a limit, so don’t be scared about that because we’ll work together.”

As H.B. 5601 goes through the legislative process, Rapundalo at MichBio urged legislators to consider language that would assure equitable access to an R&D tax credit by small and startup life sciences companies.

“Many in our industry, I’d say 70 percent-plus of our companies, are 100 employees or less and many of them are really in R&D mode. They don’t have products on the market, so they’re not profitable. Having a credit like this would be key to fueling their R&D efforts,” Rapundalo said. “Some states, for example, have made sure to put mechanisms in place to ensure that the small companies, by whatever definition, in fact are guaranteed X amount of dollars that they can tap.”

Huge step forward

Economic developers offered strong support for Hall’s legislation.

Battle Creek’s Fort Custer Industrial Park has 85 companies, mainly automotive suppliers, none of which do R&D onsite, said Battle Creek Unlimited President and CEO Joe Sobieralski. Kellogg Co. does “a little” R&D in Battle Creek, “and I’m sure they could do much more,” Sobieralski said.

“Whenever we’re working with and attracting folks, an R&D tax credit would be tremendously supportive to our efforts to attract and to diversify our economy in the little community of Battle Creek,” he said.

As the auto industry hits an inflection point in transitioning to electric vehicles, “these opportunities might not be around in five or 10 years,” Sobieralski said. The auto and aviation industries “are changing at an exponential rate,” he said.

“There’s an opportunity to capture some of this here and now,” Sobieralski said.

Brooke Oosterman, a director at Southwest Michigan First in Kalamazoo, told lawmakers that a R&D tax credit would enable the region to better compete, particularly with neighboring Indiana. 

“Our current pipeline of companies are seeing that other states are prioritizing these investments in a way that Michigan is not,” she said. “We have many incredible assets to offer and this legislation offers yet another opportunity to show the world that we are a state that is looking to the future with a desire to invest in companies here who share that same vision.”

“Having this tool is a huge step forward for economic development in our state and prioritizing next-generation technologies,” Oosterman added. “We want those to be built here, employing Michigan families, and retaining our students from our institutions of higher education.”

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