R&D Tax Credit on the Table, Business Community Calls for More Research
October 24, 2023
A research and development (R&D) tax credit for Michigan businesses with technology-based projects received its first hearing Tuesday in front of the House Economic Development and Small Business Committee.
The business community supported the idea of the tax credit, but are still looking for some technical changes. Chair Jason Hoskins (D-Southfield) said they are being considered and will be implemented soon.
The bills, sponsored by Reps. Rachel Hood (D-Grand Rapids), Jasper R. Martus (D-Flushing), Julie Rogers (D-Kalamazoo) and Ranjeev Puri (D-Canton), come after the “COVID-19 pandemic brought international supply chains to a screeching halt across the world, driving up inflation and forcing folks to recognize that we must reinvest here in America and here in the state of Michigan,” Martus said.
The credit is needed since the federal government spent a greater amount of federal funds to the states across our country than anything seen since the Great Society (program).
“The consensus that we must bring some supply chains home, combined with the understanding that once these federal funds have been spent, we have to decide what is worth investing in, are the two pillars that underpin the future of economic development here in the state,” Martus added.
Martus said he believes a central part of this vision in Michigan must be a research and development tax credit. Another 37 states already have one on the books. The closest state to Michigan without a similar credit is West Virginia.
Martus said that despite consistent rankings showing Michigan is a good state to do business in, countless companies and organizations list the lack of a tax credit as the largest deficiency in the state’s economic vision.
Hood’s HB 5099 authorizes the Michigan Strategic Fund (MSF) to create and operate a research and development tax credit for eligible businesses with a project proposal that would increase R&D spending in Michigan.
Businesses with at least 250 employees applying would have to propose increased spending by at least $500,000 annually, and businesses with under 250 employees would have to propose an increase of at least $100,000.
The spending could include a wide variety of costs under the technological research blanket, including employee wages, contract expenses and supply costs, but would not include research after commercial production or relating to cosmetic or design factors.
The MSF would establish an application process for businesses to receive the tax credit and would be responsible for determining both the amount and duration a company could receive.
The bill includes an upper limit of $100 million in credits given during a single calendar year, with at least $25 million of that annual cap reserved for eligible businesses with fewer than 250 employees.
If an agreement is reached, MSF could charge businesses an administrative fee of up to 5% the amount of the credit.
Martus’ HB 5100 establishes a credit for businesses with over 250 employees for 10% of their research and development expenses. A single applicant couldn’t receive a credit of more than $2 million per year, or $10 million over five years, and an agreement would expire after five years.
HB 5101 provides a similar credit for businesses with fewer than 250 employees, allowing a seven year credit for 15% of additional research and development expenses. A single applicant in this category would be limited to $250,000 per year, or $1 million over seven years.
Both credit programs would begin Jan. 1, 2024.
Puri’s HB 5102 provides an additional tax credit for R&D projects in collaboration with Michigan’s research universities, allowing an additional 5% of research and development expenses to be credited.
If the additional credit is claimed by a business with over 250 employees, the business is eligible for a five-year, $1 million total credit.
If it’s claimed by a business with fewer than 250 employees, it would be a seven-year, $1 million total credit.
The bills are expected to reduce General Fund revenue by approximately $100 million annually, along with increasing costs to the MSF due to reporting requirements and program creation.
Anna Langerveld, founder of Kalamazoo-based genomics testing company Genemarkers, said the bill package would assist her company with job growth, in addition to ensuring the success of a program developing genetic tests to help reduce opioid addiction.
Genemarkers currently employs around 30 people, Langerveld said, and “one of the things that’s very challenging for a small life science company here in Michigan is acquiring highly skilled talent” and competing with larger businesses to provide a competitive salary.
“Our funds are limited and we need to have salaries and benefit packages that are competitive with our larger neighbors,” she said, “so any funding that can be put back into the company to help increase the salary base for acquiring and developing new positions would be extremely helpful.”
But other members of the business community said though the bills are a helpful idea, they don’t provide enough protection or incentives for businesses to participate.
Michael Johnston, vice president of government affairs with the Michigan Manufacturers Association, said members “collectively prefer taking a different approach that better integrates the R&D tax credit into the Michigan business climate.”
That includes a credit implemented by the Department of Treasury, he said, along with one that is automatic and available to all companies both in Michigan and newly considering the state, by building it into the tax code.
“When companies are making decisions about locations and their long-term investments, they need predictability and certainty,” Johnston said. “Wondering whether or not a credit will be granted in the future creates greater uncertainty, especially compared to other states that have credits built into their tax code.”
He added that the $100 million annual budget doesn’t go very far, especially in the context of a large industrial economy.
Jeff Stoutenburg, director of state government affairs at Dow Chemical, agreed the credit has to provide certainty for businesses, “otherwise we will not use it at a large scale.”
Tyler Rossmaessler, executive director of the Flint and Genesee Economic Alliance, said after receiving the bills, his group has five recommendations.
He said a broad-based R & D tax credit should be directly tied to the federal tax credit to simplify the qualification process and keep the credit flexible if federal definitions change, similar to the Working Families Tax Credit passed earlier this year.
Other recommendations included tying a tax credit to state tax returns and ensuring it’s monitored by the Department of Treasury, “and not run like a grant program,” establishing a clear requirement that partnerships with research universities be expanded to include all state universities and increasing the dollar amount for the program “to support a robust ecosystem of research and development.”
The bill package was supported by the Metropolitan Affairs Coalition, Southeast Michigan Council of Governments, Toyota, Michbio, Michigan Bankers Association, Steelcase and Michigan Economic Development Corporation.
It was opposed by the Michigan and Grand Rapids chambers, and the Detroit Regional Chamber took a neutral position.
The bills were not taken up for a vote, and await further consideration in the House Economic Development and Small Business Committee.
Article courtesy MIRS News for SBAM’s Lansing Watchdog newsletter