The Washington state Legislature completed its session on time March 13 after 60 days. Lawmakers passed a supplemental operating budget that added more than $100 million to K-12 schools, approved a crowdfunding bill, added $1 million each for computer science enrollments at Central Washington University and Eastern Washington University, but allowed the high-tech tax incentives for Research and Development to expire.
The legislature did not pass a supplemental capital budget, which is used solely for public buildings and facilities for the first time since 1996, which left many people disappointed and frustrated. There was a great deal of discussion about a big transportation package that would have included new taxes and revenues along with funding for various road, bridge and transit projects across the state but disagreement about the mix of taxes, projects and DOT reforms prevented a major deal from coming together. Frankly, “Bertha’s” mishaps hurt DOT’s credibility and lessened the odds of a big transportation package.
For the state’s tech industry, the legislative session was a mixed bag.
Crowdfunding: The passage of the crowdfunding bill, HB2023, was a clear victory for the tech sector and entrepreneurs in general. It also showed the power and value of “showing up” in Olympia as the sizable number of entrepreneurs who attended the public hearing in the Senate was impressive.
This bill sets up a regulatory structure so that certain types of securities are exempt from state registration if offered through a crowdfunding portal that is registered at the state Dept. of Financial Institutions (DFI). Investors must be Washington state residents and have certain qualifications. The Director of DFI must make rules to implement the act.
This bill is slated to be signed by Gov. Jay Inslee at 2 p.m. this afternoon at the Governor’s conference room in Olympia.
Social Networking: HB2180, the so-called “eraser” bill, dealing with posting on social networking sites, patterned after similar legislation in California, did not come up for a vote in the House Technology and Economic Development Committee after opposition from WTIA (which I represent) and TechAmerica in a committee hearing.
Unmanned Aerial Vehicles: HB2789 was one of the several “drone” bills that made it through the legislature. This legislation is targeted to the use of drones by government agencies, especially drones that have “extraordinary sensing devices” that provide enhanced surveillance capabilities. The bill requires specific authority be given before an agency can purchase or deploy drones. There are exceptions for emergencies and life-threatening situations.
Education: SB6062 is a bill that passed the legislature that requires all school district collective bargaining agreements to be published on the internet within 30 days of approval. The bill also requires school districts with associated student body organizations to do the same with their approved budgets and spending.
On the K-12 policy front, SB6552 was the major piece of legislation that emerged from the session. One of the key components was the requirement for the 24 credit high school graduation requirement, after several years of delays. This is significant because students will have to take 4 years of english, 4 years of social studies, 3 years of math and 2 years of science. This puts Washington on par with the more high achieving states, although there is some lingering concern that the science requirement should be 3 years.
The bill sets out a process so that career related courses will have academic “equivalency” with academic courses, ensuring the same learning standards. The bill also relieves school districts of an instructional hour requirement this school year that was overly burdensome and could have prevented some students from graduating on time.
R&D Tax Credits: The biggest disappointment for the tech industry was the loss of the tax incentives for research and development, used by some 600 IT, life sciences and other R&D intensive companies in Washington. Their projected “cost” to the state of just under $132 million for the 2015-17, combined with the need to balance the state budget in a four year projection through 2017-19, the requirement to put billions more into K-12 due to the McCleary decision, combined with a desire to take a pound of flesh, metaphorically, from large tech companies, made renewal of the B&O credit and sales tax deferral an uphill battle that was lost in the 2014 session.
There were several pieces of legislation introduced, including SB6267 from Gov. Inslee and SB6430, which eventually passed the state Senate by a strong bipartisan vote of 36-13 on March 11, three days before the end of the session. The original version of SB6430 was an extension of the R&D incentives until 2040—similar to what Boeing got in the November 2013 special session, in terms of an extension period.
Once the budget and revenue collection projections came out in mid-February, SB 6430 was amended so that the R&D incentives were cut severely. In that version of the bill, companies with revenues over $50 million were ineligible for the R&D B&O credit. Companies wishing to use the sales tax deferral/exemption for R&D facilities would have seen a substantial cut in the amount of sales tax able to be deferred. These changes reduced the fiscal “cost” to the state of the R&D incentives to about $40 for the 2015-17 biennium, fitting within the projected budget and revenue numbers.
As could be imagined, companies with over $50 million in revenue, a group that has been growing in Washington for the last few years, would have seen their B&O tax increase if this version of the bill would have passed. There was also a lot of concern from those with plans to build R&D facilities in the region that their costs would be much higher than originally budgeted and therefore less competitive with other locales.
After a couple weeks of negotiations, the version of SB6430 that passed the Senate did not place limits on the use of B&O credit or sales tax deferral/exemption but put a very short extension period of less than one year on the bill. In this way, the “cost” was still about $40 million to the state. The bill called for a task force of stakeholders (elected officials, industry members, others) to come up with a permanent solution for the 2015 legislature.
When all was said and done, the state House of Representatives did not bother even holding a hearing on SB6430, seeing greater political value in allowing the R&D incentives to expire.
The WTIA and other industry members will regroup to work with legislators and the executive branch on some kind of replacement or modification of the R&D tax incentives. Over $8.7 billion of R&D was done in Washington in 2012, a growth of $2 billion since 2007 (source: DOR)—even during a very tough recession. While debating the size, level and fiscal impact of the R&D tax incentives is appropriate, allowing them to expire completely is a short-sighted, pennywise, pound foolish policy.
The tech industry will need to speak with as unified a voice as possible on this issue and others. There is an election this year and part of the House’s calculus in letting the R&D bill go by the wayside was that the tech sector will not exact a political price on House members for doing so. We can either prove them right or prove them wrong by our actions in this election season.
Lew McMurran has been lobbying for various companies, local government and trade associations for the last 24 years, the last 13 of which were spent with WSA/WTIA, representing the tech industry in Olympia. He is now an independent government relations consultant working with tech companies on issues related to state and local government. He continues to be retained for consulting and advocacy by the WTIA, which has taken positions on many of these issues.
Follow Lew on Twitter @lewismcmurran. Contact him at lewisamc
Washington State Capitol Dome image via Flickr.