Anderson leads drive to expand R&D tax benefits

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Sarah Anderson has already had a lot of face time with Rep. Greg Davids, R-Preston, chair of the House Taxes Committee, and she expects to get a lot more this session. Aside from her appearances as a member of the Taxes Committee, where her bills have received early — and positive — reviews from the committee and its veteran leader, Anderson also enjoys a well-positioned desk in the State Office Building.

“I have an office right next to Greg Davids,” said Anderson, a five-term Republican representative of Plymouth. “I’ll be talking to him a lot about this issue.”

The issue in question is the state law on research and development (R&D) tax credits, which dominated the tax panel’s Thursday hearing. Anderson brought a pair of bills designed to help small businesses make use of the credit, while freshman Rep. Roz Peterson, R-Lakeville, offered a third. It was Anderson’s second lengthy appearance before the tax committee: Earlier in the week, she presented a bill that would exempt certain income from sole proprietorships from the state income tax.

Individual business owners were also the focus of the first bill Anderson pitched on Thursday, House File 62, which would extend the R&D rebate to sole proprietors. At present, only corporations and pass-through entities, such as limited liability corporations (LLCs), can claim the credit. Anderson’s bill would let proprietors get a credit of 10 percent of all research spending up to $2 million, with 2.5 percent for expenses above that threshold.

Testifying in favor of that bill, Scott Schmidt, who runs a financial advising firm that caters to small businesses, said “very few” of his clients are classified as sole proprietors.

“I would tell you that the hit to the budget would be very small,” Schmidt said.

The same cannot be said, though, for the similar bills Anderson and Peterson presented later on Thursday. Those bills would make the R&D credit refundable, which, Anderson said, would restore the feature to its rightful nature. The Legislature made the R&D credit refundable for certain claimants in 2010, but that change was repealed in 2013.

Nevertheless, Anderson testified, the Department of Employment and Economic Development (DEED) continued to list the refundable R&D credit as an enticement for out-of-state businesses until fall 2014.

“I’m hopeful [Gov. Mark Dayton] will take that into consideration,” Anderson said after the hearing. “DEED views this as a helpful tool for the state.”

Anderson’s bill would make the first $250,000 of the credit refundable. Peterson’s bill goes further still, adding a refund option and also raising the credit for R&D expenses in excess of $2 million from the current 2.5 percent to 4 percent.

Rep. Ann Lenczewski, DFL-Bloomington, criticized the proposals, pointing out that she had been the lead author of both the original refund legislation in 2010 as well as the bill that repealed that element in 2013.

“A refundable credit means you don’t pay state taxes, you just get a check,” said Lenczewski, explaining that the refund was a casualty of the budget deficit at that time.

Anderson’s bill would amount to about $80 million in lost revenue during each of the next two budget cycles. According to studies on similar credits, states see an average of 3 to 4 percent increase in economic activity for each 1 percent of R&D tax credits offered.

“That’s huge,” Anderson said after the hearing, “because those are dollars that stay here in the state.”

All three bills were laid over for further consideration at the close of Thursday’s committee meeting.

Anderson said Sen. Terri Bonoff, DFL-Minnetonka, had authored a similar bill in the past, and would do so again this year. Sen. Rod Skoe, DFL-Clearbrook, chair of the Senate Taxes Committee, has said that Senate Democrats were planning a revision to the R&D credit and that the bill would originate in the tax reform committee. That panel has met only once this session, with another hearing scheduled for Jan. 28.

Reserve recommendation

Earlier in the same hearing, State Economist Laura Kalambokidis presented the findings of a Minnesota Management and Budget (MMB) report on the volatility of state revenues. The report, a newly mandated annual production, factors in the predictability of various tax sources to determine the agency’s recommendation for an ideal state budget reserve.

At present, Kalambokidis explained, state revenues are heavily weighted toward income tax, which makes up 52 percent of the general fund. A significant portion of that income, in turn, consists of “non-wage income,” such as capital gains, which are highly volatile, as they are often related to shifts in the stock market.

The report stipulated that the state’s recommended budget reserve is roughly $2 billion, or about 5.1 percent of estimated revenue during the 2015-16 biennium. That figure is more than twice the existing reserve amount after the November forecast; another $350 million is held in a cash-flow account.

Asked by Rep. Steve Drazkowski, R-Mazeppa, how the state’s reserve could affect its standing with the major bond-rating agencies, Kalambokidis said the various rating agencies’ formulas are something of a “black box,” and not easily predicted.

“There are a lot of other things that the rating agency is considering,” Kalambokidis said, “so [the budget reserve] is not the only thing they’re looking at.”