January 28, 2000
By: Saul Spigel, Chief Analyst
Sandra Bragg, Research Fellow
You asked for a comparison of California's, Massachusetts', New Jersey's, and Connecticut's economic development incentives for biotechnology companies, with particular attention to incentives that Connecticut does not offer.
California, Massachusetts, New Jersey, and Connecticut all provide similar mixes of tax incentives and low-cost financing to spur economic development. For the most part they treat biotechnology companies like any other manufacturing businesses, which makes them eligible for corporate tax credits for research and development (R & D) and job training expenditures, property tax credits for building facilities and acquiring equipment and machinery, sales tax exemptions for equipment and machinery acquisition, and low-interest loans or other forms of financing for construction and product development.
The other states provide some incentives that Connecticut does not. They are:
1. a 10% corporate tax credit for investment in unrelated small high technology companies, up to 50% of tax liability (i.e., an incentive for established corporations to invest in new companies, New Jersey);
2. the option, during a business' first three years of operation, of claiming (a) a 5% sales tax exemption on purchased or leased manufacturing property or (b) a sales tax refund equal to the investment tax credit the company could have claimed for the year (California);
3. a 6% corporate tax credit for investment in building “special purpose rooms” such a clean rooms (California); and
4. a blanket prohibition against state and local government agencies revealing information they receive from biotechnology companies (New Jersey).
Connecticut biotechnology companies qualify for the same types of assistance the state offers to manufacturers and other companies that do most of their business outside the state (so called “economic base businesses”). These include corporate tax credits for R & D and job training expenditures; sales and property tax incentives for plant and equipment purchases; and venture capital, equity infusions, and low-cost financing for early stage and product development and laboratory and plant construction. OLR report 99-R-0341 (attached) provides greater detail on these incentives.
Some Connecticut incentives are geared specifically to biotech companies. These are (1) a $30 million fund for financing laboratory space, (2) a sales tax exemption for machinery, equipment, tools, materials, supplies, and fuel (CGS § 12-412(89)); and (3) enterprise zone benefits (essentially, corporation and property tax breaks) for biotech companies locating anywhere in a town that has an enterprise zone and a major research university (CGS § 32-41s).
A new tax law may prove valuable to newer biotech companies that need cash-in-hand instead of the promise of lower taxes in the future. PA 99-173 allows small companies (those with $70 million or less in gross revenues) to cash in R & D tax credits they earned but cannot use because they have no tax liability against which to apply them. The cash payment, which they can obtain through the Department of Revenue Services, equals 65% of the credits' value. Another provision of this law also may benefit biotech companies, which typically do not earn profits for the many years it takes them to develop a product. This provision extended from five to 20 years the period that businesses can carry forward their net operating losses for tax purposes.
Connecticut has also organized a biotechnology industry cluster, led by Connecticut United for Research Excellence, a trade organization that includes business and educational leaders, to look at overall industry needs.
California provides one special incentive for biotech companies—investments in “special purpose buildings” such as clean rooms are eligible for a 6% credit against the franchise or income tax. Unused credits can be carried forward for eight years. A recent Board of Equalization (the agency that sets property tax policy) ruling also targeted the industry. The board approved a new set of standards for valuing biotechnology equipment that will allow more rapid depreciation.
Other California incentives for which biotech companies are eligible include:
1. a 6% franchise or income tax credit (manufacturers' investment credit, or MIC) for purchase or lease of depreciable equipment;
2. the option, during their first three years of operation, of claiming (a) a 5% sales tax exemption on purchased or leased manufacturing property or (b) a sales tax refund equal to the MIC the company could have claimed for the year;
3. a highest-in-the-nation R & D tax credit of 11% for in-house research and 24% for research payments to outside organizations like universities;
4. for new businesses, net operating loss carryforwards of up to eight years during their first three years of operation;
5. an equity investment pool dedicated to biotechnology companies (one of four such pools) available through the state's public employee and state teachers retirement systems; and
6. reimbursement or financial assistance for technical job training.
California has created eight university-based centers for biotechnology that facilitate R & D, instrumentation resources, faculty development, technology transfer, public policy, and communications. The center at the University of California San Diego, for example, seeks to link biotech companies with financial, managerial, and technical resources. The state's secretary of trade and commerce chairs an interagency task force that helps to streamline the regulatory process for biotechnology development.
The state generally does not target its incentives specifically at biotech companies. But Commonwealth BioVentures, Inc., a venture capital fund in which the state participates as a limited partner, provides seed capital and management assistance. Its Office of Business Development employs a full-time industry specialist who is responsible for guiding biotech businesses through the regulatory process and acting as an ombudsman for them.
Biotech businesses are eligible for
1. sales tax exemptions for manufacturing and most R & D equipment and supplies,
2. 10% to 15% corporate tax credits for R & D and a 3% credit for investment in fixed assets;
3. property tax exemptions for manufacturing property; and
4. construction loan guarantees from a $15 million fund for emerging growth companies.
Technology Tax Incentives
The 1997 legislature approved a package of bills to benefit small and emerging technology companies including biotech businesses. The package contained
1. a 10% corporate tax credit for investment in unrelated small high technology companies, up to 50% of tax liability (i.e., an incentive for established corporations to invest in new companies);
2. an eight-year extension, from seven to 15 years, for carrying forward net operating losses; and
3. a tax credit certificate program that allowed new biotech and other emerging technology companies to transfer unused R & D tax credits or net operating losses to profitable, unrelated companies for at least 75% of the value of the surrendered tax benefit.
These benefits were added to New Jersey's existing tax credits: (1) 10% of R & D spending above a base set by the tax department, up to 50% of tax liability and (2) 2% of qualified investments up to $1 million, again limited to 50% of tax liability.
The New Jersey Economic Development Authority is a limited partner ($2.5 million) in a $60 million venture capital fund that serves the biotechnology sector and other emerging technologies.
The legislature established a biotechnology center of excellence operated jointly by Rutgers University and the New Jersey College of Medicine. Its activities include basic research, usually jointly funded by a business and the university or medical college, and technology transfer. Two other centers also work partly in the field.
State law limits access to biotech companies' trade secrets. It prohibits state and local government agencies from disclosing information they posses on biotech companies to the public or any other state or local agencies except as allowed by federal law.