Letter to Rep. Jason Hoskins, Michigan House of Representatives — HBs 5099, 5100, 5101 and 5102 (October 16, 2023)

Summary

Letter dated October 16, 2023 from Stephen Rapundalo, PhD, President and CEO of the Michigan Biosciences Industry Association (MichBio), to Chair Hoskins at the Michigan House of Representatives, regarding HBs 5099, 5100, 5101 and 5102. MichBio supports the intent behind the bills to re-establish an R&D tax credit in Michigan and says the previous R&D Tax Credit was eliminated in 2011 because of the creation of the Michigan Business Tax. The letter offers considerations on the funding pool, eligibility criteria, credit carryover and administration, and suggests that HBs 5100, 5101 and 5102 be amended to offer refundability.

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“Letter to Rep. Jason Hoskins, Michigan House of Representatives — HBs 5099, 5100, 5101 and 5102 (October 16, 2023).” Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/2023-10-17-testimony-hecon-2023-hb-5099-5102-michbio-39311-6075b5ab94/, SHA-256 c6c57ea4f7697a329fd31d957a850857ef417fed2bcec80b59677bf5e92df9d4.

Full text

October 16, 2023

Rep. Jason Hoskins
Chair, Economic Development Commmittee
Michigan House of Representatives
P.O. Box 30014
Lansing, MI 48909-7514

Dear Chair Hoskins,

I am writing regarding HBs 5099, 5100, 5101 and 5102 that propose to institute a state
research and development tax credit for qualifying companies.

As the statewide biosciences industry association, MichBio, has long been a strong
advocate for establishing such an incentive, particularly for a R&D-intensive cluster like
ours. The elimination of Michigan’s previous R&D Tax Credit in 2011 because of the
creation of the Michigan Business Tax, was a huge blow to the statewide bio-industry and
greatly reduced our competitiveness relative to other domestic bioscience hubs. Michigan
remains among only a dozen states without a R&D Tax Credit, while other regions with
bioscience clusters have either instituted or upgraded their incentives to ensure that bio-
industry research and development is thriving and expanding.

An MIT study showed regions in the U.S. that introduced R&D tax credits experienced a
20 percent increase in high-quality, new firm formation over a 10-year period, and had a
significant effect on entrepreneurship. The study concluded that R&D tax credits help
ambitious startups flourish and evolved into a powerful driver of long-term economic
growth and job creation.

It’s precisely that kind of approach that Michigan should take and improve its
competitiveness in the realm of bioscience discovery and product development. Our
legacy biopharma, medical technology, and healthtech companies and research
institutions, the innovative start-ups in Ann Arbor, Lansing/East Lansing, Kalamazoo,
Grand Rapids, Detroit, Oakland County, and even in Traverse City and UP, and
everywhere in between – are defined by research and development.

To harvest the good jobs and positive ripple effect of private sector investment across the
Michigan economy, it is critical to recognize the unique R&D profile of bioscience
companies.

Serving Michigan’s Bio-Industry Since 1993
3520 Green Court, Suite 175 Ann Arbor, MI 48105
(o) 734-527-9150 (f) 734-302-4933 michbio.org
The incentive for companies is: do your research and development here, make your vast
research and development investments here, take your risks here, and we will give you a
credit against future income.

The bargain is, the benefit to the state is: Michigan gets the benefit now of all those
investment dollars infused into our economy, plus the state receives all the income and
property and sales taxes paid by bioscience companies and employees, all for a credit
against future income. It cannot be underscored enough: research and development tax
credits are earned by companies only after they’ve made an investment, after they’ve
spent funds in Michigan.

With that in mind, we support the intent behind HBs 5099, 5100, 5101 and 5102 to re-
establish a R&D tax credit in Michigan and applaud the legislature’s recognition that the
value of research and development spending to the state is through the tax code.

As this legislation moves forward with due diligence, we offer the following considerations
for re-establishing a state R&D tax credit:

• Funding pool - the total amount of R&D tax credits or fund pool to be allocated in a
calendar year is of critical importance. The size of the funding in the proposed bills
is significant. In turn, it raises a question regarding long-term sustainability. Such
large sums endanger fiscal predictability and program consistency. Better to have
more modest funding pools enacted for multiple years. Many states have expiration
or sunset provisions – we would strongly recommend at least five years or more –
that give companies surety.

• Eligibility criteria – what requirements will determine who is eligible to receive a
R&D tax credit, for instance, would it be i) only those companies with headquarters
in Michigan, ii) any company with an existing presence or facility in Michigan, or iii)
any company irrespective of corporate location seeking expansion or launch of
business activities in Michigan? A distinction will help define what kind of economic
development tool this incentive is intended to be. Flexibility will enhance the
prospect of its use and reward innovative corporate strategies that undergird
growth companies, regardless of industry.

• Equitable access – we applaud Rep. Rogers and co-sponsors to ensure equitable
access to credits by small companies, as developed in HB 5101. Other state
experiences disproportionately favored large companies and didn’t require
expansion of a company’s R&D efforts. Thus, rather than fostering growth and
commercial performance, such credits permitted a “windfall” of credit for R&D
activities that would have occurred even without the credit. In short, it resulted in a
poor return of tax dollar investment. On the other hand, R&D tax credits for small
companies have proven to be a great ROI for states in terms of economic impact
and job growth.

• Credit calculation – most states’ credits vary significantly but in essence are
calculated based on the amount of a business’ research expenses that exceeds a
certain base amount (“incremental”). Much depends on how a state defines the

Serving Michigan’s Bio-Industry Since 1993
3520 Green Court, Suite 175 Ann Arbor, MI 48105
(o) 734-527-9150 (f) 734-302-4933 michbio.org
base amount…and there a variety of models across the country. Whatever the
calculation, it should be defined by statute and clear to applicants.

An interesting feature to be applauded is described in HB 5102, that being where an
additional credit calculation is offered at a higher level (e.g., 20%) on expenditures
made to a state’s universities and non-profit organizations, or for that matter other
in-state companies. This is a “win-win” as it incentivizes both the R&D company and
furthers business within the state. HB 5102 would allow Michigan to differentiate
itself as most states don’t offer that kind of premium.

• Credit carryover – research expenses should be allowed carryover for a at least
seven years or even as high as 15 years, like a number of states permit.

• Refundability of credits – a refund or exchange of the R&D tax credit so that even if
a taxpayer has no tax liability is a significant consideration for early-stage,
bioscience companies with no products on the market and hence no profits. Such a
refund component would be a valuable incentive to promote technology
commercialization and further product development, while a sorely needed cash
benefit. We suggest that HBs 5100, 5101 and 5102 be amended to offer
refundability. Eleven states allow for such a refund or exchange, in some cases as
low as 50% of the eligible amount, in others, the full 100%. Indeed, Virginia allows
the credit to refunded to small companies, but not large ones, whereas
Massachusetts and Iowa permit refunds if companies meet certain job creation
measures.

• Qualified expenses - qualified R&D expenses should be broad and include:
o Expenditures incurred in connection with the taxpayer’s trade or business
represent R&D costs in the experimental, laboratory, research, and product
development sense;
o All costs such as wages, supplies, consulting fees, equipment rental or others
incident to the research and development or improvement of a product,
including any pilot model, process, formula, invention, technique, or similar
property. The product can be used by the corporation in its trade or business
(internal R&D) or can be held for sale, lease, or license; or
o Costs (not to exceed $50,000) associated with patent application filing and
preliminary freedom-to-operate/patentability search.
o Direct company costs or those incurred through professional service
arrangements (not to exceed $50,000) related to product/technology
regulatory filings and review.
o Qualifying businesses can be C Corporations, S Corporations, partnerships
and LLCs.

Expenses for more than what is defined federally would make Michigan’s R&D tax
credit very competitive. Connecticut has taken this approach and its early-stage
bioscience companies find the added coverage very attractive. Irrespective, bill
language should be explicit that Michigan’s statute does not follow sec 41 and
stands alone or at least indicate the specific sections it does follow as exceptions.

Serving Michigan’s Bio-Industry Since 1993
3520 Green Court, Suite 175 Ann Arbor, MI 48105
(o) 734-527-9150 (f) 734-302-4933 michbio.org
• Administration – it is imperative that the application and supporting documents be
as easy as possible for prospective applicants. Surprisingly, in many states, this is
not the case, and as a result companies, especially small ones are disinclined from
applying for the credit. Lessons can be learned from Indiana, Illinois, among others
on how establish and administer a R&D tax credit. Also, the state needs to ensure
that all the “fine points” and rules laid by the state credit do not conflict with federal
IRS guidelines – this is a significant problem according to those providers who work
in R&D tax credit space nationally. Ensuring alignment with federal rules will
prevent headaches for filers.

• Return on investment and performance – numerous states require regular
evaluation of economic development tax incentives. These measures stand to
provide tangible evidence on the outcomes of the incentives, information that can
be used to shape further policies to ensure fiscal prudence and a good return for
taxpayers.

Recent studies have found that the introduction of a state R&D tax credit is associated
with increased business formation and are most effective in states that already have a
significant level of research activity and a substantial high-tech business community. For
Michigan to see a similar impact, entrepreneurs and mid-size growth companies will have
to be confident that the any new R&D tax credit model will ensure equitable access and be
reliable and beneficial to business growth.

In closing, a well-structured, R&D Tax Credit would greatly strengthen the Michigan’s
economic development competitiveness in the domestic biosciences landscape. HBs 5099,
5100, 5101, and 5102 in their current form are an excellent starting point, but the
considerations noted above should be critically addressed to ensure that the most
impactful tool is deployed.

Further discussions with stakeholders, including experts in the management/servicing of
R&D tax credits should be of the highest priority before moving the legislation forward.
MichBio would be pleased to engage in such discussions and can furnish a one-pager
outlining essential elements of an optimal R&D tax credit for consideration.

Thank you for the opportunity to provide commentary.

Sincerely,

Stephen Rapundalo, PhD
President and CEO
Michigan Biosciences Industry Association (MichBio)

Serving Michigan’s Bio-Industry Since 1993
3520 Green Court, Suite 175 Ann Arbor, MI 48105
(o) 734-527-9150 (f) 734-302-4933 michbio.org

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