Study: Tax Credits Would Help MA Stem Loss of R&D Market Share
$1 billion life sciences initiative has created just 571 jobs, is too narrow to impact most Massachusetts firms engaged in R&D
BOSTON – Despite the 10-year, $1 billion life sciences initiative passed in 2008, Massachusetts has created just 571 direct life sciences jobs and was the only one of the leading states for research and development to see overall R&D spending fall between 2007 and 2011, according to a new study published by Pioneer Institute.
Regaining Massachusetts’ Edge in Research & Development
In “Regaining Massachusetts’ Edge in Research & Development,”former Massachusetts Inspector General Greg Sullivan recommends that the commonwealth adopt a Super R&D Tax Credit for increased research and development conducted in Massachusetts and an Alternative Simplified R&D Credit (ASC), similar to the one allowed under the Internal Revenue Code. When the state created its first broad-based R&D tax credit in 1991, overall R&D spending in Massachusetts jumped by more than 50 percent over the following five years.
“The life sciences only account for about one-third of company-funded R&D spending in Massachusetts,” said Sullivan, who is now research director at Pioneer Institute. “The initiative has not had a major impact overall, and most Massachusetts companies engaged in R&D are seeing no benefit at all from it.”
The life sciences initiative is targeted at businesses engaged in life science research, development, manufacturing and commercialization in the commonwealth. When Gov. Deval Patrick proposed the initiative in 2008, he said it would create 250,000 jobs over a decade. But using the same definitions of life sciences industry clusters the Massachusetts Life Sciences Center used in the “Superclusters” report it used to advocate for the initiative, Sullivan finds that the commonwealth has created just 571 life sciences jobs since the initiative’s tax incentives kicked in at the beginning of 2009.
Since then, the state Legislature has appropriated $525 million for the initiative, which translates to more than $900,000 per job created. During that time, total employment in Massachusetts has risen 6.2 percent, but life sciences employment is up by less than one percent. Between the first quarter of 2009 and the third quarter of 2013, Massachusetts ranked 13th among the states in life sciences job growth and 14th in life sciences job growth as a percentage of overall job growth.
A few recent reports found slightly more job growth since the initiative was implemented, but both use different definitions of life sciences industry sectors than the ones used in “Superclusters.” Pioneer Institute calculated that Massachusetts has gained 1,438 life science jobs when measured by a different definition employed in a 2013 study by Northeastern University economists Barry Bluestone and Alan Clayton-Mathews for the Boston Foundation.
An updated version of that study, released last week, included a higher job number, but did so by adding industry sectors that had gained jobs and dropping sectors that had lost jobs. In addition, this report includes data from 2006-2008, three years before the life science initiative’s tax credits became available. As the Boston Herald pointed out in a Saturday editorial, last week’s updated report was silent on how many of the new jobs created “could be directly attributed to the money the state borrowed on the backs of the taxpayers to invest in the industry.”
The Massachusetts Biotechnology Council’s “2013 Industry Snapshot” also revised the definitions of life sciences sectors, dropping 11 sectors that had incurred net losses of 2,267 jobs since 2009 and replacing them with one that gained 181 jobs. That report found a net increase of 3,024 life sciences jobs.
Despite slight gains in life sciences-related employment, overall R&D spending in Massachusetts fell by 10.3 percent between 2007 and 2011. Among businesses, R&D spending fell by 19.3 percent over that time. In particular, Massachusetts fell further behind chief R&D rival California, which significantly increased its R&D market share over that same period.
“Massachusetts has a comparative advantage in knowledge sectors of the economy because of its powerful mix of prestigious research institutions, a highly skilled workforce, and venture capital leaders,” said Jim Stergios, Pioneer’s executive director. “We need more powerful tax mechanisms that attract greater investment but do not distort the marketplace by driving them to favored industries.”
“Regaining Massachusetts’ Edge in Research & Development”recommends that the Commonwealth build on its comparative advantage in R&D-related industries by adopting one of two approaches:
- The Super R&D Tax Credit for increased research and development conducted in the commonwealth would provide a credit for qualified research expenses greater than 150 percent of average expenses over the previous three years. Maine is the only state that currently offers the credit. Ten nations, though not the United States, also offer it.
- An Alternative Simplified R&D Credit (ASC), similar to the one allowed under the Internal Revenue Code, would be equal to 12 percent of the excess of current-year qualified research expenses over 50 percent of the taxpayer’s average qualified research expenses for the prior three years. For start-ups, the credit would equal 6 percent of current-year qualified research expenses. Presently, Iowa is the only state that offers a version of the ASC.
California offers much stronger tax incentives and research has shown that R&D tax credits are effective in stimulating expansion of research activities and attracting and retaining companies involved in R&D. Massachusetts is in a strong position to attract these businesses due to its academic resources and broad cluster of existing R&D firms.
In 1991, Massachusetts enacted a set of research and development tax incentives that were among the most advantageous in the nation. Over the next five years, R&D spending in the commonwealth increased by more than 50 percent, which outstripped rival states.
Massachusetts’ ranking among the states in overall R&D spending rose from fifth to second between 1993 and 2006. But although its rank improved, Massachusetts lost market share over that period to California, which has enacted much stronger tax incentives. The commonwealth’s overall share of R&D spending declined between 1991 and 2011.
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Pioneer Institute is an independent, non-partisan, privately funded research organization that seeks to improve the quality of life in Massachusetts through civic discourse and intellectually rigorous, data-driven public policy solutions based on free market principles, individual liberty and responsibility, and the ideal of effective, limited and accountable government.
