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Experts say economic edge at stake with R&D tax credits

| Saturday, Sept. 13, 2014, 9:00 p.m.
Clinical Scientist Tyler Keay (left), Clinical Translation Studies Leader Laura Drogowski (bottom) and Manager, Operations Joe Birsa (right) pose for a portrait at the offices of Omnyx in the Strip District on Tuesday, Sept. 2, 2014. Omnyx, a joint venture of GE Healthcare and UPMC, sells a digital pathology software meant to digitize the traditional disease diagnosis process of looking at tissue samples under a microscope. The company was able to hire Keay, Drogowski and Birsa by using money from state development and research tax credits.
Stephanie Strasburg | Tribune-Review
Clinical Scientist Tyler Keay (left), Clinical Translation Studies Leader Laura Drogowski (bottom) and Manager, Operations Joe Birsa (right) pose for a portrait at the offices of Omnyx in the Strip District on Tuesday, Sept. 2, 2014. Omnyx, a joint venture of GE Healthcare and UPMC, sells a digital pathology software meant to digitize the traditional disease diagnosis process of looking at tissue samples under a microscope. The company was able to hire Keay, Drogowski and Birsa by using money from state development and research tax credits.
Clinical Translation Studies Leader Laura Drogowski points to tissue samples on slides at the offices of Omnyx in the Strip District on Tuesday, Sept. 2, 2014. Omnyx, a joint venture of GE Healthcare and UPMC, sells a digital pathology software meant to digitize the traditional disease diagnosis process of looking at tissue samples under a microscope. The company was able to hire Keay, Drogowski and Birsa by using money from state development and research tax credits.
Stephanie Strasburg | Tribune-Review
Clinical Translation Studies Leader Laura Drogowski points to tissue samples on slides at the offices of Omnyx in the Strip District on Tuesday, Sept. 2, 2014. Omnyx, a joint venture of GE Healthcare and UPMC, sells a digital pathology software meant to digitize the traditional disease diagnosis process of looking at tissue samples under a microscope. The company was able to hire Keay, Drogowski and Birsa by using money from state development and research tax credits.

America stands to lose its edge with corporate research and development — and accompanying jobs — to countries that offer companies robust, permanent incentives to conduct innovation projects, experts warn.

Advocates of government support for corporate research and development say political maneuvering blunts incentives in the United States, causing uncertainty and potentially costing jobs.

Tax credits can be a “game changer” for businesses, said an executive with Omnyx LLC, a North Shore company developing a pathology system using digital images of tissue samples that doctors traditionally view under a microscope to diagnose diseases.

The credits, enacted by Congress in 1981 and in Pennsylvania in 1997, encourage corporate taxpayers to increase R&D expenditures. Lawmakers hope the credits enhance economic growth.

“Those credits were very timely for us,” said Andy Chomos, chief financial officer at Omnyx. He said the company's computer-aided image diagnostics have the potential to analyze images faster and more accurately than a doctor with a microscope.

Congress is considering a renewal of the federal R&D tax credits that expired at the end of 2013. Since enacted, the federal credit has been extended 15 times. The House passed a renewal bill in March but the Senate has not acted.

“As with everything else in Washington these days, it's the victim of partisan gridlock,” said Matt Lavoie, spokesman for the National Association of Manufacturers, which lobbies on behalf of 11,000 members. “It's running into the machine that is swallowing up everything in Washington this year.”

Nationally, companies claimed nearly $9 billion in R&D tax credits in 2010, according to National Science Foundation statistics.

There's a lot at stake for companies in the region that have significant R&D centers. A tally of 20 large companies here showed they spent more than $1.4 billion on R&D in 2012, led by PPG Industries Inc., which spent $470 million, and Alcoa Inc., $197 million, according to figures compiled by the Pittsburgh Regional Alliance.

Some experts question the effectiveness of the credits, but advocates say they need more.

“The U.S. used to be a leader in R&D incentives. Unfortunately, we've fallen behind and new technology will be created elsewhere,” said Cristina Crooks, director of tax policy for the manunfacturers' association. Seventy percent of the tax credit helps pay for high-salaried tech jobs, “which are important to a growing economy, for manufacturers and international competition,” she said.

Offsetting tax flaws

The Information Technology and Innovation Foundation in Washington estimates the United States ranks 27th out of 42 countries studied in R&D tax incentive generosity, down from 23rd five years ago.

Mick Kane, an R&D tax credit specialist at Deloitte LLC in New York, acknowledges the United States lags behind but said he has found no direct evidence that companies decide to locate research centers overseas solely because of more attractive tax credits.

Big companies with research centers here and abroad might move some work overseas, he said.

More than 30 countries offer incentives such as cash grants. Russia, Brazil, United Kingdom and 11 other nations offer enhanced deductions.

“If you qualify for a $100 deduction, they give you $150, $200 or in some cases $300, such as Singapore,” Kane said. “Some are refundable and are very attractive.”

Lyman Stone, a researcher with the Tax Foundation in Washington, said federal R&D tax credits “add complexity, but insofar as they are justifiable, they serve as an offset for other flaws in the tax system.”

An often cited flaw is the nation's 35 percent corporate income tax rate, which lately has prompted some American companies to buy foreign companies and reincorporate overseas to reduce tax expenses.

A study by the Milken Institute estimated that reducing the tax rate to match the overseas average of about 26 percent would trigger growth. By 2019, it could boost gross domestic product by 2.2 percent, or $375.5 billion, lead to 350,000 manufacturing jobs, and increase employment by 2.13 million.

State-level promotion

Founded in 2008 by UPMC and General Electric Healthcare, Omnyx employs 100, including two scientists and an operations manager for software development and clinical studies hired last year using money from Pennsylvania's R&D tax credit program.

“We were able to sell those credits to help fund our staffing needs,” said Chomos, the financial officer.

Omnyx sold a $326,702 tax credit to Verizon Communications, he said. Pennsylvania is one of two states that allow such transactions.

Among 40 states offering incentives, Pennsylvania has awarded $488 million in R&D tax credits to 2,085 companies since its program began, a Department of Revenue report said. Capped at $55 million a year, the program earmarks one-fifth for small businesses.

Yet state-level R&D tax credits can present problems, such as “free-riders,” said Stone, with the Tax Foundation.

“If some cancer research is done in Rhode Island, for example, the benefits won't be in Rhode Island. ... The issue at the state level is, the benefits are largely captured out of state,” she said.

In June, Pennsylvania senators killed a proposed two-year freeze of tax credits in a budget plan. The idea had prompted 1,000 members of the Pittsburgh Technology Council to write lawmakers, said Brian Kennedy, the council's vice president for government affairs and strategic programs.

Corporate recipients are a “powerful interest group,” Stone said. “You have highly educated, highly trained individuals working in high-profit jobs. Legislators love to get a photo op with people who are working on the next generation of technology and say, ‘This is because of legislation on tax credits that I introduced.' ”

But, Stone cautioned, “What do we do for the people in the state who pay higher taxes to subsidize the R&D tax credits?”

John D. Oravecz is a Trib Total Media staff writer. Reach him at 412-320-7882 or joravecz@tribweb.com.

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