Pros outweigh cons in BIA R&D study

A proposed research and development tax credit might create jobs and help the economy — but it is not going to pay for itself when it comes to generating state revenues.

That was the unexpected bad news buried in a report that Ross Gittell gave to key legislative leaders and government officials at a May 3 breakfast meeting of the Business and Industry Association of New Hampshire. Still, Gittell emphasized, the investment would be worth making.

It was news that was not lost on Rep. Margaret Smith, D-Durham, who chairs the House Finance Committee, or on members of the House Ways and Means Committee, both of whom will be considering Senate Bill 134, the tax credit against the business profits tax and the business enterprise tax that was approved last month by the Senate.

Under the proposal, the credit, which would be capped at $50,000 per company with a carryover for five years, would be capped statewide at $1 million.

After seeing a chart that showed that the entire $1 million of tax credits would only stimulate enough business to replace the $50,000 of taxes lost from one single business, Smith pointedly asked, “How do you suggest the state offset the loss of revenue?”

“This is going to cost money,” agreed Gittell, but the BIA had not asked him to find the money, he said. Indeed, it wasn’t a question that the BIA had anticipated when it hired Gittell to report on the economic impact of the credit.

“Our assumption up to this research was that at the very worst this was tax-neutral,” said David Juvet, vice president of the BIA. “But we have to look at this as in any other appropriation to invest in economic development.”

Still, argued Gittell and the BIA, the investment would be worth it — not so much because it would give New Hampshire an advantage over other states but because it would get rid of what is seen as a major Granite State shortcoming.

Already, Gittell said, some 40 states have such a tax credit, including every state in the Northeast. Tennessee is the nearest state that doesn’t offer one.

When Smith asked Gittell, “What are the advantages of coming in at the end of the line?” the economist pointed to other charts showing that the state’s high-tech leadership was slipping compared to states with an R&D credit. In 2003 and 2004, while companies in Rhode Island – which has the second-highest such credit in the country – increased their R&D expenditures by 6.7 percent, New Hampshire’s expenditures shrunk by 4.1 percent.

In 1999, he pointed out, New Hampshire ranked seventh in high-tech employment, and in 2007 it ranked 13th. Rhode Island, however, jumped from 29th to 15th. Massachusetts, which has the fifth most generous R&D tax credit, continued to rank first in high-tech employment.

There are other reasons for R&D investment besides a tax credit, such as a strong university research presence and a highly skilled workforce. That’s why New Hampshire had ranked so high in the past. But a credit could make the difference to some companies faced with a close decision about where to locate. And New Hampshire is starting lose some of those companies, Gittell said.

“I’m very worried about the trends,” said Gittell, and that is because a high-tech credit spills over to the rest of the economy.

First, he said, the tax credits actually result in almost twice as much private investment in research and development — 1.8 times as much, to be exact. And it is this spending that increases a country’s competitiveness.

The state will continue to lose manufacturing jobs overseas, said Gittell. Those jobs aren’t coming back. Growth will come in companies continually developing new products to meet changing demand.

“R&D is the driver of the economy in the 21st century,” said Gittell. “Our competition is global, and we don’t want to have to compete against low-wage countries with cheap labor. We want to be competing on the high end.”

And what’s the good of investing in a well-educated workforce, if the state doesn’t have high end jobs to retain them once they graduate, Gittell asked.

The “social spillover” also comes in spending derived from this highly paid workforce in terms of housing, purchasing of higher-end merchandise, dining out and so on, according to Gittell. All told, $1 million in R&D tax credits would create 70 more jobs, $53 million in personal income and $5 million in additional state products. It’s this spillover that makes the subsidy more justifiable in a state like New Hampshire, which so fully embraces a free market ideology, he said.

The spillover scenario would result from the proposed R&D credit passed by the Senate. Without the $1 million cap, it is estimated that the state would hand out $6.5 million in credits, resulting in 330 new jobs and $24 million in products.

The proposed New Hampshire credit also falls short of states that have higher individual caps. Larger companies are not likely to relocate because of a $50,000 credit, but it could be more significant for smaller companies, especially high-tech start-ups.

Still, subsidizing business, even primarily small business, was not an easy thing to sell to House members, even though both the governor and the state Senate have as signed on to the bill. Smith compared it to the bidding war among states and municipalities to attract companies, and questioned whether it would be better just to cut the business-tax rate a little bit.

Gittell, however, emphasized that not all tax credits are alike, and a slight tax cut won’t achieve the same results as a targeted one, which requires business to do exactly what’s needed for a state.

And individual incentive packages don’t leverage the same amount of benefits, he said. He pointed to the case of North Carolina wooing a Google server farm with a package of incentives worth $260 million to create some 250 jobs. That’s more than 35 times more per job than the proposed R&D tax credit, Gittell said.

“It’s just more effective than trying to lure a single company,” Gittell said.