Science and Technology Incentives, Economic Development Incentives Evaluation Series (June 13, 2022)
Summary
A June 13, 2022 report to the Governor and the General Assembly of Virginia from the Joint Legislative Audit and Review Commission (JLARC), Science and Technology Incentives, part of its Economic Development Incentives Evaluation Series. The summary states that spending on these incentives totaled $39 million in FY20 and $176 million between FY11 and FY20. It states that research indicates R&D incentives are effective, but that Virginia's are too small to meaningfully increase statewide business R&D activity overall, because the value of the R&D credits over the period equaled only 0.15 percent of overall R&D spending in the state. The chapters cover research and development incentives, tax incentives for private investment in startups, direct financial incentives for startups and space tax incentives.
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Commonwealth of Virginia
June 13, 2022
Report to the Governor and the General Assembly of Virginia
Science and Technology Incentives
Economic Development Incentives Evaluation Series
JOINT LEGISLATIVE AUDIT
AND REVIEW COMMISSION
Joint Legislative Audit and Review Commission
Senator Janet D. Howell, Chair
Delegate Robert D. Orrock, Sr.,, Vice Chair
Delegate Terry L. Austin
Delegate Kathy J. Byron
Delegate Betsy B. Carr
Delegate Barry D. Knight
Senator Mamie E. Locke
Senator Jeremy S. McPike
Senator Thomas K. Norment, Jr.
Delegate Kenneth R. Plum
Senator Lionell Spruill, Sr.
Delegate Luke E. Torian
Delegate R. Lee Ware
Delegate Tony O. Wilt
Staci Henshaw, Auditor of Public Accounts
JLARC staff
Hal E. Greer, Director
Kimberly Sarte, Associate Director for Ongoing Oversight and Fiscal Analysis
Ellen Miller, Chief Economic Development and Quantitative Analyst
Information graphics: Nathan Skreslet
Managing editor: Jessica Sabbath
Economic analysis
Terance J. Rephann, Regional Economist
Weldon Cooper Center for Public Service
JLARC Report 562
©2022 Joint Legislative Audit and Review Commission
http://jlarc.virginia.gov
Contents
Summary i
Recommendations v
Science and Technology Incentives 1
1. Research and Development Incentives 5
2. Tax Incentives to Encourage Private Investment in Startups 19
3. Direct Financial Incentives for Startups 33
4. Space Tax Incentives 41
Appendixes
A. Study mandate 49
B. Research methods and activities 51
C. Economic benefits and return in revenue for all Virginia incentives 60
reviewed to date
D Agency responses 63
Appendixes – Online only
E. R&D tax credits by locality
F. R&D tax incentives by state
G. Angel investment tax credits by locality
H Incentives for private investor of startups by state
I. GAP Funds and CRCF incentives by locality
J. State investment fund and commercialization programs for startups
K. State space incentives
L. Economic impact modeling
M Results of economic and revenue impact analysis
N. Peer reviewed research
O. References
Summary: Science and Technology Incentives
Virginia provides 11 incentives to promote science and technology economic activity
by businesses in the state. Spending on these incentives totaled $39 million in FY20
and $176 million between FY11 and FY20. More than half (56 percent) of this amount
was for the state’s three research and develop-
ment (R&D) incentives. Spending on science
WHY WE DID THIS STUDY
and technology incentives has grown over time
Through language in the Appropriation Act, the General
and reached 10 percent of spending on state
Assembly directed the Joint Legislative Audit and Review
economic development incentives in FY20, pri- Commission (JLARC) to review and evaluate economic
marily because of adoption of the major R&D development initiatives. Topics include spending on incentives
tax credit. and activity generated by businesses receiving incentives; the
economic benefits of incentives; and the effectiveness of
incentives.
WHAT WE FOUND
JLARC releases two reports each year: a high-level summary
Research indicates R&D incentives are report on overall spending and business activity and an in-
effective, but Virginia’s are too small depth report on the effectiveness of individual incentives. (See
to meaningfully increase statewide Appendix A: Study mandate.) JLARC contracted with the
Weldon Cooper Center for Public Service to perform the
business R&D activity overall analysis for both reports.
Virginia offers three R&D tax incentives—the This report is the sixth in the series of in-depth reports on the
major R&D tax credit, the R&D expenses tax effectiveness of individual incentives and focuses on Virginia’s
credit, and the R&D sales tax exemption—to science and technology incentives.
encourage private R&D activity in the state. Re-
search suggests R&D tax credits increase R&D activity, particularly for smaller com-
panies that are more likely to face financial constraints. Virginia’s R&D tax credits likely
have increased R&D expenditures and activity for many of the companies using them.
However, they have had limited impact on increasing statewide R&D activity because
the total value of the credits over the last 10 years has equaled only 0.15 percent of
overall R&D spending in the state during that period. Even significant increases in
funding for the tax credits would likely not have a meaningful impact on the state’s
business R&D activity: analysis suggests doubling the credit would only increase the
state’s business R&D intensity slightly. Other factors likely have a greater influence on
R&D activity overall in the state, such as the strength of the economy and industry
mix.
The measurable economic benefits and returns in state revenue from R&D incentives
are negligible based on economic impact modeling, but the actual benefits are likely
greater. The analysis does not capture the spillover benefits to other companies and
only captures short-term impacts of the R&D tax credits. Though understated, the
economic benefits of the R&D expenses tax credit are slightly higher than the major
R&D tax credit, and this is likely because the R&D expenses tax credit targets smaller
companies and has more features of a well-designed tax credit.
i
0BSummary: Science and Technology Incentives
Tax credit to encourage private investment in high-tech startup
businesses has little impact on startup growth
Virginia offers the Qualified Equity and Subordinated Debt Investments Tax Credit
(angel investment tax credit) to encourage private equity investment in high-tech
startup companies. The credit has had little impact on business startup growth because
it is not well designed to ensure investments are made in startups with growth poten-
tial. The incentive does not target professional, experienced investors. In addition,
startups assisted by investors receiving angel investment tax credits have not leveraged
much additional private investment, which they need to grow. Because of these factors
and the credit’s lack of job creation requirements in return for receiving the incentive,
this credit is estimated to have a negligible economic benefit and return in state reve-
nue.
State’s programs providing financial assistance directly to startups
help businesses innovate and grow
Virginia offers two programs that provide financial assistance directly to startups. The
Growth Acceleration Program (GAP) Funds make early, seed-stage equity investments
in small technology and life sciences startups, and the Commonwealth Research Com-
mercialization Fund (CRCF) program provides grants to small, high-tech startups that
are also in very early stages of development. Both programs report high investment
leverage rates, meaning projects have received additional private investments needed
to grow. The CRCF program has also helped Virginia remain competitive in receiving
federal grant funding for small business innovation and research. The programs are
well designed with a rigorous application and review process for awarding program
funds, and program staff provide support to the assisted startups.
The GAP Funds program has a high economic benefit and return in revenue, in part,
because proceeds from the sale, move, or public offering of a company in the program
can fund future equity investments. The CRCF program has a low measurable eco-
nomic benefit because grant recipients experienced low levels of employment growth,
which is typical for this type of program because it leverages universities for research-
related activity. However, steps are being taken to broaden eligibility to more sectors,
which may enable faster growing projects to be funded, increasing the impacts of the
program.
Space tax incentives have minimal impact on space activity
Virginia offers three tax incentives to support increased space flight activity in Virginia,
but the incentives do not have much influence on increasing space activity in the state.
They also have negligible economic benefits and returns in state revenue because most
of the components for space flight vehicles launched in Virginia come from out-of-
state or international suppliers.
Factors other than the incentives are much more influential in attracting space flight
activity to Virginia. Virginia’s Mid-Atlantic Regional Spaceport (MARS) is one of four
ii
0BSummary: Science and Technology Incentives
facilities nationally that has vertical launch facilities, and it has locational advantages
on the East Coast. Virginia has also provided significant funding directly to support
MARS, including $15 million in annual operating appropriations, more than $50 mil-
lion in additional appropriations for infrastructure, and $28 million in grants to com-
panies to support infrastructure development at MARS.
Most science and technology incentives have a negligible economic benefit
Spending Incentive Economic benefit
Program FY20 type per $1M of spending
Growth Acceleration Program (GAP) Funds $3.3M Equity investment
Commonwealth Commercialization Research Fund 1.9 Grant
Major R&D tax credit 17.2 Tax credit
R&D expenses tax credit 5.2 Tax credit
Angel investment tax credit 3.9 Tax credit
R&D exemption 5.3 Exemption
Capital gains subtraction 0.9 Subtraction
Exemption/
Space tax incentives 1.1
subtraction
Total $39.0M
Negligible Low Moderate High
SOURCE: Weldon Cooper Center economic impact analysis of incentives.
NOTE: The economic benefits of each incentive are assessed relative to the economic benefits of other incentives evaluated in this series to
date. Economic benefits can range from negligible to high. See Appendix C for methodology for categorizing the economic benefits of
each incentive. The venture capital subtraction is not included because it has not been used yet. The spaceport exemption and Zero G
resupply subtraction are reported together to prevent disclosure of taxpayer information, because the tax subtraction has very few users.
WHAT WE RECOMMEND
Legislative action
• Prioritize the R&D tax credits for smaller companies that will likely benefit
more from them.
• Improve the effectiveness of the major R&D tax credit by adjusting the reim-
bursement structure and prioritizing research conducted with higher education
institutions.
• Eliminate the angel investment tax credit.
• Eliminate the space flight income tax subtractions after the current contract to
resupply the International Space Station expires.
The complete list of recommendations and options is available on page v.
iii
0BSummary: Science and Technology Incentives
iv
Recommendations: Science and Technology
Incentives
RECOMMENDATION 1
The General Assembly may wish to consider prioritizing Virginia’s research and devel-
opment tax credits for smaller companies by amending §§ 58.1-439.12:08 and 58.1-
439.12:11 of the Code of Virginia to either (i) reallocate a portion of the Major Re-
search and Development Tax Credit to the Research and Development Expenses Tax
Credit cap or (ii) combine the two credits and give smaller companies priority for
awards.
RECOMMENDATION 2
The General Assembly may wish to consider amending § 58.1-439.12:11 of the Code
of Virginia to adopt a step-rate reimbursement structure for the Major Research and
Development Tax Credit.
RECOMMENDATION 3
The General Assembly may wish to consider amending § 58.1-439.12:11 of the Code
of Virginia to adopt an annual company-level cap for the Major Research and Devel-
opment Tax Credit.
RECOMMENDATION 4
The General Assembly may wish to consider amending § 58.1-439.12:11 of the Code
of Virginia to prioritize research conducted with Virginia higher education institutions
for the Major Research and Development Tax Credit by providing a higher company-
level cap for awards for such research.
RECOMMENDATION 5
The General Assembly may wish to consider eliminating the Qualified Equity and
Subordinated Debt Investments Tax Credit by repealing § 58.1-339.4 of the Code of
Virginia.
RECOMMENDATION 6
The General Assembly may wish to consider not renewing the investment periods for
the (i) long-term capital gains subtraction, which ended June 30, 2020, and (ii) venture
capital subtraction, which will end December 31, 2023.
RECOMMENDATION 7
The General Assembly may wish to consider amending §§ 58.1-322 and 58.1-402 of
the Code of Virginia to eliminate the Zero G Zero Tax income tax subtractions after
the current contract to resupply the International Space Station expires.
v
Recommendations: Science and Technology Incentives
RECOMMENDATION 8
The General Assembly may wish to consider amending § 2.2-2213 of the Code of
Virginia to require the Virginia Commercial Space Flight Authority to include in its
annual report a summary of (i) its six-year strategic plan, (ii) how available state funds
have been spent to achieve the strategic plan goals to date, and (iii) the extent to which
the strategic plan goals have been achieved to date.
vi
Science and Technology Incentives
Economic Development Incentives Evaluation Series
Virginia provides economic development incentives to encourage business growth as
part of its economic development strategy. To better understand the effectiveness of
these incentives in stimulating business activity, the General Assembly directed the
Joint Legislative Audit and Review Commission (JLARC) to conduct, on a continuing
basis, an evaluation of the effectiveness and economic benefits of economic develop-
ment incentives such as grants, tax preferences, and other assistance. (See Appendix A
for the study mandate.) This report is part of a series of annual reports that provide
comprehensive information about the effectiveness and economic benefits of individ-
ual economic development incentives offered by the state. JLARC contracted with the
University of Virginia’s Weldon Cooper Center for Public Service to perform the eval-
uation.
This report examines 11 science and technology economic incentive programs (Table).
The Commonwealth provides three economic development incentives to promote re-
search and development (R&D) of new and improved products and processes. They
include the Major Research and Development Tax Credit, targeted to larger companies
with R&D budgets of $5 million or more; the refundable Research and Development
Expenses Tax Credit, targeted to smaller firms with annual research expenditures less
than $5 million; and the Research and Development Sales and Use Tax exemption.
Five incentives are designed to encourage the growth of innovative startup businesses.
Three incentives provide tax relief for individual investors of these businesses, includ-
ing the state’s “angel investor” tax credit (formally known as the Qualified Equity and
Subordinated Debt Investments Tax Credit), the Qualified Business Long-Term Cap-
ital Gains Subtraction, and the Venture Capital Account Subtraction. Two incentives,
the Growth Acceleration Program (GAP) Funds and the Commonwealth Research
Commercialization Fund, provide financial assistance directly to startups.
Three programs provide tax incentives to Mid-Atlantic Regional Spaceport (MARS)
users to encourage space launch activity at that facility. Two Zero Gravity Zero Tax
income tax subtractions encourage companies to use the spaceport for human flight
training or supplying the International Space Station. The Virginia Spaceport Users
Exemption provides a sales and use tax exemption for inputs, components, and sup-
plies used for activities undertaken at MARS.
State spending on these 11 incentives totaled $176 million over the past decade (FY11–
FY20). Annual spending on these incentives grew substantially over the period (from
$6 million in FY11 to $39 million in FY20) because several of the incentives were
adopted in FY11 or after (Table). The Major Research and Development Tax Credit is
new (adopted in 2016), is by far the largest incentive evaluated in this report, and makes
up most of the spending growth for these incentives. Forgone revenue for the Major
1
Science and Technology Incentives
Research and Development Tax Credit was $6 million in FY18, and this amount grew
to $17.2 million in FY20, making it among the largest of the state’s incentives in FY20
in terms of spending. (See Appendix D, Economic Development Incentives 2021, JLARC
2021.)
TABLE: Virginia’s 11 science and technology incentives are covered in this report
Purpose
Spending Spending Startup Space launch
Program FY20 FY11–FY20 R&D activity growth activity
Major Research and Development Tax Credit $17.2M $28.0M
Research and Development Exemption 5.3 39.1
Research and Development Expenses Tax Credit 5.2 31.5
Qualified Equity and Subordinated Debt
3.9 24.5
Investments (“angel investment”) Tax Credit
Growth Acceleration Program (GAP) Funds 3.3 21.6
Commonwealth Research Commercialization
1.9 13.3
Fund
Space tax incentives (3 incentives) 1.1 6.7
Qualified Business Long-Term Capital Gains
0.9 11.1
Subtraction
Venture Capital Account Subtraction 0.0 0.0
All programs $38.6M $175.9M
SOURCE: Weldon Cooper Center review of Code of Virginia and agency documents.
NOTE: Spending on tax credits includes amounts claimed.
Virginia, like many states, has adopted incentives to target high technology, bioscience,
and other innovative sectors, hoping to enhance the state’s reputation as a technology
hub. These sectors also typically offer high-paying jobs and employ well-educated staff,
which help to strengthen the state economy. Despite adopting these incentives, Vir-
ginia’s performance on some key high technology indicators lags the nation. Virginia
performs well on basic measures of high technology performance, but it lags on some
indicators that reflect the vitality of private innovation and entrepreneurship, such as
patent activity and R&D intensity (Table).
These incentives, however, likely have little influence on these measures. Many of the
incentives are less well targeted than research indicates they should be, or they have
limited ability to influence the key measures of vitality of innovation and entrepre-
neurship. The size of the incentives is also small compared with the statewide business
activity in these areas, so the incentives cannot be expected to have a significant impact
on business activity overall in the state. For example, the R&D tax credits represented
less than 0.5 percent of estimated business R&D spending in Virginia in 2019.
2
Science and Technology Incentives
TABLE: Virginia performs well on basic measures of high technology
performance but lags on measures indicating vitality of innovation and
entrepreneurship
Virginia’s rank
Measure among U.S. states
Basic measures of high technology performance
Federal R&D obligations per employed worker (2019) 5th
Federal Small Business Innovation Research/Small Business Technology
6th
Transfer Research grant funding per $1 million in GDP (2016─2018)
High Tech Employment (2020) 7th
Measures of vitality of private innovation and entrepreneurship
Fast growth companies per 1 million residents (2021) 2nd
Venture capital per $1 million in GDP (2019) 19th
Total R&D intensity (percentage of GDP) (2018) 25th
Patents per capita (2020) 27th
Business R&D as percentage of output (2019) 29th
University business startups per 100,000 population (2016-2020) 33rd
SOURCE: Association for University Technology Managers, U.S. Census Bureau; EMSI; Inc. Magazine 5000; National
Science Foundation; U.S. Patent and Trademark Office, U.S. Census Bureau.
3
Science and Technology Incentives
NOTE: Impact to state economy is underestimated and does not include spillover effects and long-term effects of R&D spending.
4
Science and Technology Incentives
1. Research and Development Incentives
Virginia offers three research and development (R&D) incentives to encourage private
R&D activities in the state. The Major Research and Development Tax Credit (major
R&D tax credit) and Research and Development Expenses Tax Credit (R&D expenses
tax credit) both allow companies to earn tax credits for eligible R&D expenses (Table
1-1). The major R&D tax credit is targeted to companies with higher levels of R&D
spending (more than $5 million), and the R&D expenses tax credit is targeted to com-
panies with smaller amounts of R&D spending. Companies may also claim the Re-
search and Development Exemption, which allows them to purchase goods such as
chemicals, lab equipment, and computer hardware and software used for eligible R&D
activities tax free.
The U.S., along with Virginia and other states, has long recognized the importance of
innovation through research and development to long-term economic growth. Coun-
tries with higher levels of R&D spending tend to have higher levels of GDP. However, Spillovers are used to
private companies often underinvest in R&D from a societal standpoint because they do justify government inter-
not capture the full returns from their investment. The benefits of R&D often “spill- vention in R&D. If one
business creates some-
over” to other companies (through improved products and processes) and the public thing innovative, the
at-large (reduced costs from improved products and processes). Thus, R&D is more knowledge often spills
beneficial to society than to the business performing R&D. For this reason, economists over to other businesses
and policymakers often justify incentives to encourage R&D. as they learn from the
original R&D without
Virginia adopted its first R&D tax credit—the R&D expenses tax credit—in 2011 to having to pay the full
be more competitive with 35 other states that already had R&D credits. Virginia’s R&D R&D costs. Society also
benefits because of the
tax credit, like credits in many states, was modeled after the federal R&D tax credit,
improved products and
which was designed to incentivize companies to invest more in R&D than they other- processes (safer vehicles,
wise would. This is accomplished by providing credits only for incremental R&D ex- improved health care,
penses over a base amount, though in some cases it may allow taxpayers to earn credits etc.).
even if R&D expenses have decreased from prior years. Unlike many Virginia tax cred-
its, the R&D expenses tax credit is refundable. It was also originally available to all
companies with qualifying expenses. The General Assembly adopted the nonrefunda-
ble Major R&D tax credit in 2016 to incentivize larger amounts of R&D spending and
restricted the original R&D expenses tax credit to smaller companies.
Even though Virginia adopted its tax credits later than most states, companies have
been able to purchase goods for R&D activities tax free in Virginia for some time.
Virginia adopted the R&D sales tax exemption when the retail sales and use tax was
adopted in 1966 to “recognize the importance of research and development to the
state’s industrial and economic progress.”
5
Science and Technology Incentives
TABLE 1 -1
Virginia provides three incentives to encourage research and development
Major Research and Development Expenses Tax Credit (adopted 2016)
Purpose Promote research and development activities
Eligible Companies with qualifying R&D expenses in Virginia greater than $5 million.
beneficiaries Qualifying expenses include employee wages, contract research expenses, and supplies. Expenses for
research on human cells or tissue derived from induced abortions or from stem cells obtained from
human embryos are not eligible.
Credit Tax credit amount is 10% of the difference between qualified R&D expenses during the taxable year
features and 50% of the average R&D expenses incurred during the previous 3 years. For example, the tax credit
amount for a taxpayer with $8M in qualifying R&D expenses in 2020 and an average of $6 million in
qualifying expenses in the prior 3 years would be $500,000 or 10% x ($8M – ($6M x 50%)). If the
taxpayer did not have qualified R&D expenses in any one of the three prior taxable years, the tax credit
is 5% of the qualified R&D expenses in that taxable year.
Nonrefundable tax credit that can be claimed against the individual and corporate income and bank
franchise tax a. Capped at $24 million b annually, with no per company cap. Credits are prorated among
eligible applicants if amount exceeds the cap. Credit amount taxpayers can claim on tax returns cannot
exceed 75% of their tax liability that year, and excess credits can be carried over for 10 years. Expires
January 1, 2025.
Research and Development Expenses Tax Credit (adopted 2011)
Purpose Promote research and development activities.
Eligible Companies with qualifying R&D expenses in Virginia of $5 million or less. Qualifying expenses are the
beneficiaries same as the major R&D tax credit.
Credit Credit amount can be calculated using one of two methods: (i) the original method, which is 15% of
features the first $300,000 of expenses in a tax year above a base amount, which accounts for R&D expenses
and firm sales for prior years (or 20% if conducted with a Virginia higher education institution), or (ii)
a simplified method, which is the method used to calculate credits for the major R&D Tax Credit and
does not factor in prior year sales.
Refundable tax credit that can be claimed against the individual and corporate income and bank
franchise tax a. Capped at $45,000 per company (or $60,000 if conducted with a Virginia institution of
higher learning) and $7.77 million b overall, annually. Expires January 1, 2025.
If the total annual approved tax credit amount is less than the credit cap, Virginia Tax allocates the
remaining amount, on a pro rata basis, to taxpayers already approved for the credit. These
supplemental credits are equal to 15% of the second $300,000 in qualified research expenses or 20%
of the second $300,000 if the taxpayer’s base credit was based on qualified research that was
conducted in conjunction with a Virginia public or private college or university (if the original method
for calculating the reimbursement was used), or an amount equal to the excess of the applicable
limitation to the base credit amount (if the simplified method was used).
Research and Development Exemption (adopted 1966)
Purpose Promote research and development activities and recognize the importance of R&D to the state’s
industrial and economic progress.
Eligible Companies that purchase tangible goods used for qualifying R&D activities that advance existing
beneficiaries knowledge or technology; the development of new uses for existing products, technology, or
processes; or the improvement of existing products, technology, or processes.
6
Science and Technology Incentives
Research and Development Exemption (cont’d)
Exemption Tax exemption for tangible personal property purchased for use or consumption directly and
features exclusively in basic research or research and development in the experimental or laboratory sense.
Exempt items when used directly and exclusively in research include laboratory tools, parts,
components, and equipment; drugs, chemicals and raw materials; computer hardware and software;
technical books and journals; papers and supplies, protective clothing, furniture; items used for
transport or storage; heating and cooling equipment.
Purchases of goods used for both exempt and nonexempt purposes are not eligible for the
exemption. Purchases for secondary activities such as administration, general maintenance, product
marketing, and other supportive activities are also not eligible for the exemption.
SOURCE: Weldon Cooper Center review of the Code of Virginia and agency documents.
NOTE: Authorized by §§ 58.1-609. 3(5), 58.1-439.12:08, and 58.1-439.12:11 of the Code of Virginia.
a
Bank franchise tax is imposed on the net capital of banks and trust companies. b Annual caps increased effective
taxable year 2021 and after for both the Major R&D (from $20 million) and the R&D expenses tax (from $7 million).
Businesses saved $28 million in taxes in FY20 with R&D incentives,
primarily with the major R&D tax credit
Tax savings from Virginia’s R&D tax incentives totaled nearly $100 million during the
10-year period from FY11 to FY20. Prior to adoption of the major R&D tax credit,
tax savings from R&D incentives averaged $6 million per year. After adoption of the
major R&D tax credit in 2016, average tax annual savings increased to $20 million,
with total savings reaching $28 million in FY20. (Figure 1-1).
FIGURE 1-1
Tax savings from R&D expenses substantially increased after adoption of the
major R&D tax credit (FY11–FY20)
SOURCE: Weldon Cooper Center analysis of economic development incentives.
NOTE: Numbers may not sum because of rounding.
7
Science and Technology Incentives
The average eligible taxpayer received larger savings from the major R&D tax credit
than the R&D expenses tax credit, because the tax credit is targeted to companies with
larger R&D expenses and does not have a per taxpayer cap. Average taxpayer savings
were $293,000 per return for the major R&D tax credit during the study period and
$23,000 per return for the R&D expenses tax credit, based on analysis of corporate
returns. The R&D expenses tax credit, however, benefits more businesses. In FY20,
more than 175 companies claimed the R&D expenses tax credit on tax returns com-
pared with 39 companies that claimed the major R&D tax credit, based on corporate
returns.
The majority (59 percent) of the R&D tax credit savings has been for companies in
the professional, scientific, and technical services and the information industry sectors
(Figure 1-2). Companies benefiting from the tax credits are concentrated in Northern
Virginia, likely because of the proximity to Washington, D.C., and the high concentra-
tion of professional, scientific, and technical service industry employment in the re-
gion. (See online Appendix E for a map of R&D tax credits by locality.)
FIGURE 1-2
Majority of tax savings from the R&D tax credits has gone to companies in the
professional, scientific, and technical services and information sectors
SOURCE: Weldon Cooper Center analysis of economic development incentives.
NOTE: Amounts are based on tax credits utilized for the R&D expenses tax credit (FY13–FY20) and major R&D tax
credit (FY18–FY20) and are based on corporate returns only.
As intended, users of the R&D expenses tax credit are generally much smaller than
major R&D tax credit users, based on employment size. Half of the companies re-
ceiving R&D expenses tax credits have fewer than 100 employees, while half of the
companies receiving major R&D tax credits have 1,000 employees or more (Figure 1-
3). Eligibility for the credits is contingent on R&D spending and not employment
levels, but companies with higher employment levels likely have more resources to
devote to R&D.
8
Science and Technology Incentives
FIGURE 1-3
Companies receiving R&D expenses tax credits tend to be much smaller than
companies receiving major R&D tax credits
SOURCE: Weldon Cooper Center analysis of economic development incentives.
Companies benefiting from the R&D exemption probably have a similar industry pro-
file as companies that use the tax credits. Detailed information on R&D exemption
users is not collected as with many other sales and use tax exemptions.
Research indicates R&D tax credits increase R&D activity, particularly
for smaller companies
The majority of empirical research studies addresses the impacts of R&D tax credits
on R&D spending, and they find credits increase R&D spending. Early studies found
that each $1 spent on an R&D tax credit stimulates an additional $1 of business R&D
spending. More recent studies suggest that the multiplicative effect may be 2.0 or
higher, suggesting $1 in tax credits stimulates at least $2 of additional business R&D
spending. However, the effect of R&D tax credits on spending may be overstated,
because some companies have mischaracterized expenditures as R&D related to claim
the federal credits. Some federal R&D credits were lowered by 20 percent after the
companies were audited.
Less research has been conducted on R&D credits’ impacts on other outcomes, but
these studies also generally indicate tax credits increase R&D activity. Several studies
have found that state R&D tax credits generated small increases in the number of
R&D-related employees, establishments, and business startups. Studies have assessed
the effect of R&D tax credits on patent activity and found that credits encourage firms
to engage in more innovative projects, as measured by the estimated lifetime value of
patents, and that a 10 percent reduction in R&D user costs are associated with nearly
9
Science and Technology Incentives
a 30 percent increase in biotech patent filings. (See online Appendix N for more detail
summarizing the research.)
Research has also examined effects of R&D tax credits by firm size and industry, with
general consensus that smaller firms are more responsive to R&D tax credits than
larger firms. Several studies have found that R&D tax credits, particularly refundable
tax credits, have larger effects for smaller companies or for business startups because
these businesses are more financially constrained and have less ability to obtain capital.
Research on the effect of R&D tax credits in different industries has had conflicting
findings on which industries benefit most.
Though the research on R&D tax credits is generally positive, several unresolved ques-
tions remain about how best to publicly subsidize R&D activity. These questions in-
clude whether public subsidies should be through financial assistance to private firms
(like tax incentives) or funding for higher education research activities (also found to
be effective in boosting business R&D expenditures).
Virginia’s R&D tax credits are too small overall to meaningfully
increase statewide business R&D activity
R&D intensity, a com- Evidence indicates that R&D tax credits can increase R&D activity, and Virginia’s
mon measure of R&D R&D tax credits likely have increased R&D expenditures and activity for many of the
activity, is R&D expendi-
companies using them. The total tax credit amounts are too small, however, to have a
tures in a region divided
by the gross domestic
meaningful effect on statewide business R&D activity. Between FY11 and FY20, the
product of the region. total value of the R&D tax credits is equal to only 0.15 percent of private R&D spend-
Business R&D intensity ing in the state. A 2019 report by a national consultant concluded that current funding
excludes government- levels for the R&D tax credits, and even significant increases in the credit caps, are
funded R&D spending likely to be insufficient to meaningfully improve the state’s business R&D activity. This
and represented 55% of
conclusion is consistent with the findings from analysis for this report and research
total R&D spending in
Virginia in 2019 (com- that suggests other factors have a greater influence on business R&D activity.
pared with 81% nation-
Further analysis for this report also indicates that significant increases in the amount
wide).
allocated for R&D tax credits would not improve the state’s business R&D intensity, a
Virginia compares more
favorably to the nation
common measure of R&D activity. This is the case even if it is assumed that the tax
on overall R&D intensity credits have a multiplicative effect of 2.0. For example, assuming that every $1 in tax
than on business R&D credits increases R&D spending by $2, doubling the overall credit amount claimed in
intensity because of Vir- 2019 would have only boosted the state’s R&D intensity from 1.33 percent to 1.35
ginia’s high rate of fed-
eral R&D spending. Vir-
percent in that year.
ginia’s overall R&D in- Significant increases in the amount allocated for the tax credits would also not improve
tensity is 2.1 (versus 2.9
nationally), but Virginia’s
Virginia’s business R&D intensity relative to many other states, including Washington
business R&D intensity is (6.94 percent), Michigan (4.42 percent), North Carolina (2.58) and Maryland (1.72).
1.33, which is half of the Of these four states, only Maryland offers an R&D tax credit, and it is smaller than
national rate of 2.6 per- Virginia’s credits (capped at $12 million annually). This suggests that factors other than
cent.
tax credits influence R&D intensity. This also likely explains why the national consult-
10
Science and Technology Incentives
ant recommended that the state consider other strategies to strengthen the connec-
tions between businesses and the state’s universities to improve private research fund-
ing, facilitate intellectual property transfer, and improve university commercialization.
Other factors have a greater influence on R&D intensity, such as the strength of the
current economy. Research indicates business R&D spending is closely linked with
corporate revenue, and consequently, is sensitive to economic conditions. This likely
explains, in part, why the business R&D intensity for both the U.S. and Virginia de-
clined during and immediately following the Great Recession. The U.S. economy re-
covered more quickly from the Great Recession than Virginia’s economy, which may
partially explain why U.S. business R&D intensity has exceeded its pre-recession level
(2.62 percent in 2019 versus 2.28 in 2008), but Virginia’s has not (1.33 percent in 2019
versus 1.88 in 2008).
R&D spending is also affected by a region’s industry mix, with manufacturing firms
accounting for approximately 62 percent of domestic R&D expenditures. Manufac-
turing receives 61 percent of federal R&D tax credit allocations but only 17 percent
of Virginia’s R&D tax credits.
While other factors may have a greater effect on business R&D activity statewide than
the R&D tax credits, annual overall caps on both credits have likely limited their effect
on individual business decisions to invest in R&D. Both tax credits have been over-
subscribed and required proration; therefore, businesses have received far less than the
full credit amount for which they are eligible (Figure 1-4).
FIGURE 1-4
Businesses have received far less than the full credit amount for which they are
eligible because the credits are oversubscribed
SOURCE: Virginia Tax.
NOTE: Taxpayers received supplemental credit amounts (more credits than they requested) for the R&D expenses
tax credits between 2011 and 2013 because total requested amounts were less than the cap (see Table 1-1). Annual
caps for both credits have changed over time. The R&D expenses tax credit was originally $5 million, but it was
increased to $6 million (2014), $7 million (2016), and $7.7 million (January 1, 2021). The original cap for the major
R&D tax credit was $20 million; it was increased to $24 million as of January 1, 2021.
11
Science and Technology Incentives
R&D exemption also has limited effect on encouraging R&D activity
but achieves some of its objectives
The R&D sales tax exemption’s effectiveness in encouraging R&D activity is also lim-
ited because, like the tax credits, it represents a very small portion of overall business
R&D spending. Tangible goods used for R&D are eligible for the exemption. How-
ever, most R&D expenses are for wages and contractual expenses, which are not eligi-
ble. Only one-eighth of R&D expenses are for tangible goods, but not even all of
those qualify for the exemption, according to a 2015 report by Virginia Tax. (For ex-
ample, expenditures on tangible goods related to quality control and testing do not
qualify.) Virginia Tax estimated that taxpayer savings from the exemption are less than
two-tenths of 1 percent of total R&D spending.
Stakeholders from a 2011 JLARC review of the effectiveness of Virginia tax prefer-
ences indicated that the R&D exemption may still provide value to companies starting
a new facility because it reduces, even if only marginally, high upfront costs such as
stocking equipment and supplies. The R&D exemption is also interrelated with the
manufacturing exemption (available for purchases of intermediate goods used in the
industrial process to develop a final product), because R&D activities frequently result
in the production of new products, likely enhancing the value of the exemption. To-
gether, the R&D exemption and manufacturing exemption exempt virtually all pur-
chases of tangible goods used directly in product development activities—from initial
product research to the final production for market.
The R&D exemption achieves some of its objectives. The R&D exemption was cre-
ated in the 1966 legislation that established the sales and use tax. Like the airline com-
mon carrier and ships and vessels exemptions that JLARC reviewed in 2021, the R&D
exemption was adopted to recognize the importance of R&D and to support innova-
tion to advance the state’s industrial and economic progress, according to Virginia Tax
reports.
Economic impact Measurable economic benefits and returns in state revenue from R&D
analysis of incentive
spending between FY11 tax incentives are negligible, but actual benefits are likely greater
and FY20 was conducted Using economic impact modeling, the R&D expenses tax credit and sales tax exemp-
using economic model-
ing software developed
tion are estimated to have generated small amounts of measurable economic activity
by REMI, Inc. for the state between FY11 and FY20, and the major R&D tax credit is estimated to
(See Appendix L for the have resulted in economic losses. Economic losses occur because the increase in taxes
economic impact analy- to pay for the tax credit was greater than the small amount of jobs, Virginia GDP, and
sis used in this study.) personal income generated by the credit (Table 1-2).
The overall (economic and social) impact of the incentives, though, is underestimated by
this analysis because it does not reflect the incentives’ spillover or long-term impacts.
The spillover of a firm’s R&D spending on other companies in the state or on Virginia
residents could be substantial and increase the economic activity related to the incen-
tives, depending on how much of these effects remain in Virginia. However, spillover
12
Science and Technology Incentives
effects can be difficult to measure accurately, and it can be difficult to model their
Net impact is the
regional economic impacts. The estimates in this report also only reflect measurement increase in economic
of short-term economic impacts of the R&D tax incentives and do not account for activity induced by the
enhancements in firm performance over time because of productivity improvements incentives after adjusting
for the opportunity cost
or increased sales from the introduction of new products. Research indicates R&D tax
of increasing taxes to
credits can have long-term impacts that do not materialize until five years after they pay for the incentives.
are adopted. (See Appendix M for
more information.)
Table 1-2
R&D tax incentives have negligible economic benefits and returns in state revenue (FY11–
FY20), but they are understated
Annual average FY11–FY20
Major R&D R&D expenses R&D
tax credit tax credit exemption
Net impact to Virginia economy
Private employment -4 jobs 1 job 9 jobs
Virginia GDP ($0.3 M) $0.6 M ($0.5 M)
Personal income ($0.3 M) $0.1 M $0.9 M
Impact to Virginia economy per $1 million of incentives
Private employment 5 jobs 8 jobs 10 jobs
Virginia GDP $0.8 M $1.3 M $0.9 M
Personal income $0.5 M $0.8 M $1.0 M
Impact to state revenue
Total revenue $0.1 M $0.2 M <$0.1 M
Incentive awards $2.8 M $3.2 M $3.9 M
Revenue net of awards ($2.7 M) ($3.0 M) ($3.9 M)
Return in revenue 4¢ for every $1 spent 5¢ for every $1 spent 1¢ for every $1 spent
SOURCE: Weldon Cooper Center economic impact analysis of amount of incentive spending between FY11 and FY20 for R&D exemption, FY13
and FY20 for R&D expenses tax credit, and FY18 and FY20 for major R&D tax credit.
NOTE: Includes direct, indirect, and induced impacts. Gross impact on Virginia’s economy is used to calculate impact per $1 million in incentive
awards. This is consistent with how the economic development research literature typically calculates these impacts. (See Appendix M for
detailed results on total impact of the incentives, impact of raising income taxes by the amount of the incentives [opportunity cost], and revenue
generated by source.) For the R&D tax credits, these estimates assume that $1 in credits resulted in additional R&D spending ($1.75 in additional
spending by R&D expenses tax credit users and $1.25 in additional spending by major R&D tax credit users).
The economic benefits of the R&D tax credits and exemption, as well as the return in
state revenue, are also negligible compared with other incentives evaluated for this
series when assessed per $1 million spent. (See Appendix C for more detail on the
comparison of economic benefits and the return in revenue generated by Virginia in-
centives.) The economic benefits and return in revenue are slightly higher for the R&D
expenses tax credit than they are for the major R&D tax credit. The R&D expenses
tax credit has several design features that likely increase its effectiveness. The credit
• is targeted to smaller companies that are more responsive to R&D tax credits
and for which economic benefits are more likely to remain within the region;
13
Science and Technology Incentives
• is refundable, meaning taxpayers can receive a tax refund if the credit amount
exceeds their tax liability, and they do not have to carry over the credit to an-
other year;
• has a per taxpayer cap, allowing more taxpayers to use it; and
• provides a higher reimbursement (the taxpayer cap and credit rate are higher)
for research that is conducted in conjunction with a higher education institu-
tion.
Several changes would improve the R&D tax credits
Even though the R&D tax credits have not influenced statewide R&D activity, there
are several reasons to maintain the R&D tax incentives. Research indicates that R&D
tax credits lead to increased R&D spending and can have positive spillover effects
that generate high social returns. Maintaining the R&D tax credits would allow Vir-
ginia to remain consistent with 35 other states that have them. Finally, the major
R&D credit has only been in place since FY18, so adequate time has not passed to
evaluate its full impacts.
The R&D exemption also achieves its objective of recognizing the importance of
R&D activity to the state economy. The exemption helps Virginia remain consistent
with other states, many of which also provide R&D exemptions. (See online Appen-
dix F for information on states with R&D tax credits and exemptions.)
However, several changes should be made to the R&D tax credits to improve their
effectiveness and economic benefits to the state. The R&D tax credits are set to ex-
pire January 1, 2025, but if they are extended, they could be improved and evaluated
again to determine the effectiveness of the changes.
There is insufficient basis to conclude that increasing the amounts available for the
R&D tax credits would substantially improve the state’s business R&D activity overall.
Analysis shows even significant increases in Virginia’s R&D tax credits would not sub-
stantially improve the state’s R&D business activity. Other policies and funding to
strengthen the connections between businesses and the state’s universities to improve
private research funding, facilitate intellectual property transfer, and improve university
commercialization, should be considered instead.
Prioritize R&D tax credits for smaller companies by allocating a larger
portion of total funding for the R&D expenses tax credit
Prioritizing Virginia’s R&D tax credit spending on smaller companies would improve
the overall economic benefits of the combined R&D tax credits. Smaller companies
are more likely to face credit constraints that inhibit their ability to perform produc-
tive R&D. Research indicates smaller companies are also more likely to increase
R&D activity as a result of R&D tax incentives than large companies.
14
Science and Technology Incentives
Prioritizing smaller companies would align Virginia with several other states that re-
strict their R&D tax credits to small businesses (Connecticut, New Mexico, and
North Dakota). Several others prioritize smaller companies by providing them with
more generous credit reimbursements, allowing only smaller companies to be eligible
for refundable credits, or allocating to small companies a specific portion of credits.
• Arizona: credit is partly refundable (at 75 percent) for small businesses with
150 employees or less.
• Delaware: credit reimbursement (50 percent of federal credit amount) is
doubled (to 100 percent of federal credit amount) for small companies with
annual gross receipts under $20 million.
• Louisiana: credit reimbursement rate varies by employment size and is 30
percent for businesses with fewer than 50 employees, 10 percent for 50–99
employees, and 5 percent for 100 or more employees.
• Maryland: credit is refundable for small businesses (assets less than $5 mil-
lion in a given year) and $3.5 million (30 percent) of the overall cap is set-
aside for them.
• Pennsylvania: 20 percent of the credit (capped at $15 million) is set aside
for small businesses (assets totaling less than $5 million for the taxable year
the R&D expenses were incurred), which are reimbursed at a higher rate.
• New York: credit reimbursement rate is 20 percent for companies with
fewer than 10 employees and 15 percent for companies with 10 or more em-
ployees (for the life sciences credit).
To prioritize Virginia’s R&D tax credits for smaller companies, Virginia should real-
locate a portion of the funding from the major R&D tax credit to the R&D ex- The proration factor is
penses tax credit by increasing the R&D expenses tax credit cap (currently $7.77 mil- the share of tax credits
each taxpayer can re-
lion) and reducing the major R&D tax credit cap (currently $24 million). The R&D ceive for the credit to re-
expenses tax credit is more effective and is increasingly oversubscribed and award main under the overall
amounts prorated. credit cap. If the credit is
capped at $5 million and
Determining how much to reallocate to the R&D expenses tax credit is a policy deci- taxpayers collectively re-
quest $6 million in cred-
sion. For example, increasing the cap by 10 percent (to $8.55 million) would improve its, the proration factor is
the proration factor slightly (increasing it from 37 percent to 41 percent of 2020 re- 83 percent ($5 million /
quested amounts).The R&D expenses tax credit would represent 27 percent of the $6 million).
total allowed spending for both credits rather than the 20 percent currently. Dou-
bling the R&D expenses tax credit cap to $15.54 million would increase the prora-
tion factor to 74.6 percent (assuming 2020 requested amounts), and the R&D ex-
penses tax credit would represent 37 percent of the total allowed spending for both
credits.
Virginia could also combine the two credits and prioritize smaller companies for
15
Science and Technology Incentives
awards. This could be done by prioritizing funding requests for smaller companies or
allocating a larger proportion of total credits to smaller companies. Currently, com-
panies claiming the R&D expenses tax credit are those with eligible R&D expenses
of $5 million or less, but other criteria such as employment or assets could be used
to determine eligibility as a small business. Receipt of federal grant funding through
the highly competitive Small Business Innovative Research (SBIR) and Small Busi-
ness Technology Transfer (STTR) matching fund programs could also be used to
help identify small businesses. Using these criteria could be helpful for identifying
particularly innovative projects to receive tax credit support if the credit continues to
be oversubscribed. Refundability of the credit could be restricted to smaller compa-
nies, so that they can continue to use the credit even if they have no tax liability.
Combining the R&D tax credits and prioritizing smaller companies would likely
make it easier to reallocate funding to larger companies in years when requests for
smaller companies are below the cap.
RECOMMENDATION 1
The General Assembly may wish to consider prioritizing Virginia’s research and devel-
opment tax credits for smaller companies by amending §§ 58.1-439.12:08 and 58.1-
439.12:11 of the Code of Virginia to either (i) reallocate a portion of the Major Re-
search and Development Tax Credit to the Research and Development Expenses Tax
Credit cap or (ii) combine the two credits and give smaller companies priority for
awards.
Adopt changes to improve major R&D tax credit predictability,
attractiveness, effectiveness, and economic benefits
Virginia should adopt several changes to improve the major R&D tax credit. Even if
the R&D tax credits are combined, these changes should apply for awards to larger
companies. Several of these changes will bring the major R&D tax credit more in
line with the R&D expenses tax credit, which already has more features of optimal
design.
Virginia should adopt a step-rate reimbursement structure to increase the attractive-
ness of the major R&D tax credit. The attractiveness of the credit would improve
because this change would increase the annual proration factor for the credit. Be-
cause the tax credit is heavily oversubscribed, taxpayers have received only a small
fraction of the credit amounts requested (15 percent proration in FY20). Virginia
could adopt a step-rate reimbursement structure similar to several states (Indiana,
Minnesota, and North Dakota) that provides higher reimbursement for initial R&D
outlays and lower rates for additional spending. For example, the first $1 million of
qualified expenditures could be reimbursed at a 10 percent rate, with a step down
rate of 5 percent offered for any additional expenditures. This approach also priori-
tizes mid-size companies that spend less.
16
Science and Technology Incentives
To illustrate the benefit of this change, in FY20 under the current reimbursement
structure, a taxpayer with $20 million in eligible R&D expenses would be approved
for $2 million in tax credits but only allowed to claim $300,000 in credits because of
the 15 percent proration. Assuming a step-rate reimbursement structure, the taxpayer
would have been approved for a lower amount of credits ($1.05 million), but able to
claim a higher percentage of their credit request (28 percent proration factor), and
allowed to claim nearly the same amount in credits ($294,000). This change, in partic-
ular, would benefit mid-size companies with lower R&D expenses because a com-
pany with $10 million in eligible R&D expenses in FY20 would have only been al-
lowed to claim $150,000 in credits under the current reimbursement structure but
claim $280,000 in credits under the step-rate structure.
RECOMMENDATION 2
The General Assembly may wish to consider amending § 58.1-439.12:11 of the Code
of Virginia to adopt a step-rate reimbursement structure for the Major Research and
Development Tax Credit.
Virginia could also adopt an annual taxpayer cap for the major R&D tax credit to im-
prove the predictability of the credit. Predictability of the tax credit would improve
because the taxpayer would know the maximum credit amount they would be al-
lowed (the cap). This change would increase the tax credit’s annual proration factor,
meaning taxpayers would be able to claim a higher percentage of eligible credit
amounts. Some taxpayers may be able to claim higher credit amounts than without
the taxpayer cap. Other states impose caps on their R&D tax credits (Arkansas, Mar-
yland, and New Hampshire), and Virginia imposes caps on several tax credits, includ-
ing the R&D expenses tax credit.
An annual taxpayer cap at approximately $300,000 between 2016 and 2020 would
have brought the supply of and demand for the credit into balance, eliminating the
need to prorate the tax credit for tax years 2016 and 2017 and greatly increasing the
proration factor for tax years 2018 (93 percent proration) and 2020 (73 percent pro-
ration). This change would also reduce the impact of one or more substantial credit
requests by taxpayers on the overall annual credit cap and likely ensure many mid-
size firms receive their full credit amount.
RECOMMENDATION 3
The General Assembly may wish to consider amending § 58.1-439.12:11 of the Code
of Virginia to adopt an annual company-level cap for the Major Research and Devel-
opment Tax Credit.
The major R&D tax credit should prioritize research conducted with higher educa-
17
Science and Technology Incentives
tion institutions by offering higher tax credit awards to companies performing eligi-
ble R&D activities with Virginia colleges and universities. Prioritizing research con-
ducted with higher education institutions would improve the economic and social
benefits of the tax credit because research conducted with universities is more likely
to involve basic research (research for the advancement of scientific knowledge with-
out a specific product as a goal) and is more likely to result in positive spillovers than
purely commercial research conducted within firms.
This change could be accomplished by establishing a higher per company cap for
companies that conduct eligible R&D activities with higher education institutions.
The R&D expenses tax credit already encourages R&D partnerships with Virginia
colleges and universities by providing a higher reimbursement rate and taxpayer cap
to businesses partnering with Virginia’s higher education institutions for eligible
R&D activity.
RECOMMENDATION 4
The General Assembly may wish to consider amending § 58.1-439.12:11 of the Code
of Virginia to prioritize research conducted with Virginia higher education institutions
for the Major Research and Development Tax Credit by providing a higher company-
level cap for awards for such research.
18
Science and Technology Incentives
2. Tax Incentives to Encourage Private Investment in
Startups Angel investors are typi-
Virginia offers three tax incentives to encourage private equity investment in startup, cally wealthy individuals
who provide personal
high-tech companies in Virginia (Table 2-1): capital to startup or
early-stage companies in
• The Qualified Equity and Subordinated Debt Investments Tax Credit
exchange for equity in
(angel investment tax credit) - allows angel investors to receive a tax credit the company. They are
for their investment in small, high technology, Virginia-based businesses. called ‘angels’ because
they often invest in risky,
• The Qualified Business Long-Term Capital Gains Income Tax Subtrac- unproven business ven-
tion (capital gains subtraction) - allows investors to deduct long-term cap- tures for which other
ital gains income (from investments held for more than one year) earned from sources of funds are not
available.
an investment in small, high technology, Virginia-based businesses.
Long-term capital gains
• The Venture Capital Income Tax Subtraction (venture capital subtrac- are profits earned from
tion) - allows investors to deduct their investment in a qualifying venture cap- the sale of real estate, a
business, stocks, bonds,
ital account that makes eligible investments. Unlike the other two incentives, or other capital assets
investments in small, high technology businesses are not required for investors held by the seller for
to qualify for the subtraction, but venture capital accounts tend to target inno- more than a year.
vative businesses with high growth potential. Venture capital account
or fund is a form of pri-
Unlike typical economic development incentives, these incentives provide the tax ben- vate equity raised from
efit to the investor, not the business. Investors can claim the tax benefits when they private and institutional
file their state income taxes. Investors are prohibited from using the angel investment investors. Venture capital
tax credit and the capital gains subtraction for the same investment. The venture cap- funds also provide tech-
nical, operational, and
ital subtraction, which was adopted in 2017, has yet to be utilized. managerial expertise to
The capital gains subtraction may have been intended to be a temporary solution to startup businesses that
are funded.
encourage private financing for business growth during the Great Recession without
having an immediate impact on state finances, according to news reports. The original
legislation creating the subtraction specified that qualifying investments must be made
Virginia also offers the
between July 1, 2010 and June 30, 2013. Forgone revenue because of the capital gains
Small Business Invest-
subtraction would affect the state budget at a future date because investments must be ment Grant to encour-
held for at least a year to qualify as capital gains income. Therefore, even though the age investment in small
subtraction was adopted in 2011, the first subtractions could not be claimed until 2012. businesses. This program
is not targeted to high
tech or fast-growing
businesses and was eval-
uated for a prior report,
Workforce and Small
Business Incentives
(JLARC 2018).
19
Science and Technology Incentives
NOTE: Beneficiaries are estimates of unduplicated investors (FY11–FY20) and unduplicated companies (FY17–FY20) based on tax return
information.
20
Science and Technology Incentives
TABLE 2 -1
Virginia provides three incentives to encourage private investment in Virginia startups
Qualified Equity and Subordinated Debt Investments Tax Credit (angel investment tax credit)
(adopted 1998)
Purpose Promote private investment in small, startup Virginia high-technology companies.
Eligible Angel investors who purchase equity in (stock or ownership interest) or provide subordinated debt (an
beneficiaries unsecured loan) to a small business in Virginia in certain high-technology sectors.
“Inside investors,” such as company officers and employees or their family members, are excluded.
Investors must hold the investment for at least 3 years.
Credit Nonrefundable tax credit in the amount of 50% of the qualified investment made during the taxable
features year. Can be claimed against individual income tax. Capped at $5 million annually overall and per
taxpayer at $50,000 or the taxpayer’s tax liability, whichever is less.
Credits are prorated if the amount requested in a tax year exceeds the cap. Half of the total $5 million
available for awards is reserved for investment in businesses that commercialize university intellectual
property (IP), but unused amounts are usable by other eligible applicants.
Businesses eligible for the investment (qualified business) must be (i) small, with less than $3 million in
gross revenues and have received less than $3 million in equity or debt investment; (ii) Virginia-based,
with its principal place of business and substantially all of its ‘production’ in Virginia; and (iii) in
advanced computing, advanced materials, advanced manufacturing, agricultural technologies,
biotechnology, electronic device technology, energy, environmental technology, information
technology, medical device technology, or nanotechnology.
Cannot claim this credit and several other incentives for the same activity (Capital Gains Subtraction,
Venture Capital Subtraction, Virginia Real Estate Investment Trust Subtraction, Small Business
Investment Grant).
Can be carried over for 15 years. No expiration date.
Qualified Business Long-Term Capital Gains Subtraction (adopted 2010)
Purpose Promote private investment in small Virginia high-technology companies.
Eligible Investors with long-term capital gains income or carried interest income from investments in a small,
beneficiaries high technology business in Virginia.
Investors must hold the investment for at least 1 year, but have few other restrictions. “Company
insiders” and family members of the business owners are not expressly prohibited.
Incentive Income tax subtraction that allows corporate and individual taxpayers to subtract long-term capital
features gains income or carried interest income from a qualifying business from their taxable income. Carried
interest income is income or fees paid to general partners that usually remain in the equity
investment and are “carried” over from year to year until the investor cashes out. There is no annual
or per taxpayer cap.
Investment must be a “qualified business” that meets the same criteria for the Qualified Equity and
Subordinated Debt Investments Tax Credit or a technology business certified by the secretary of
administration a or secretary of commerce and trade.
The investment must have been made between April 1, 2010 and June 30, 2020, but the subtraction
can be claimed far into the future because there is no year specified by which the capital gains must
be realized to claim the subtraction.
Taxpayers cannot claim this and the Qualified Equity and Subordinated Debt Investments Tax Credit
for the same investment.
21
Science and Technology Incentives
Venture Capital Subtraction (adopted 2017)
Purpose Promote investment in early stage companies in Virginia.
Eligible Taxpayers with income attributable to an investment in a certified Virginia venture capital account.
beneficiaries
Incentive Income tax subtraction that allows corporate and individual taxpayers to subtract investments in a
features venture capital account from their taxable income. There is no annual or per taxpayer cap.
Investment must be in a venture capital account certified by Virginia Tax, and the account must plan
to invest at least 50% of its capital in qualified portfolio companies and employ at least one
professional investor (at least 4 years of professional venture capital or similar investment
experience).
Qualified portfolio companies must have their primary business location in Virginia; must engage
primarily in the production, sale, research, or development of a product or service other than
management or investment capital; and provide equity in the company in exchange for capital. A
qualified portfolio company cannot be an individual or sole proprietorship.
The investment must be made between January 1, 2018 and December 31, 2023. There is no annual
or per taxpayer cap.
SOURCE: Weldon Cooper Center review of the Code of Virginia and agency documents.
NOTE: Authorized by §§ 58.1-339.4, 58.1-322.02, and 58.1-402 of the Code of Virginia.
a
Originally the secretary of technology, which was reorganized under the secretary of administration.
Investors saved $5 million in taxes in FY20 because of business
startup investment incentives
Tax savings from Virginia’s tax incentives to encourage private investment in startups
totaled nearly $36 million during the 10-year period from FY11 to FY20, and $5.1
million in FY20. Two-thirds of the savings over the 10-year period are attributable to
the angel investment tax credit. Tax savings for this credit have increased from $1.6
million in FY11 to $3.9 million in FY20. No taxpayers have realized savings from the
venture capital subtraction.
The angel investment tax credit is one of Virginia’s most generous tax credits, partic-
ularly for individuals. Nearly $25 million in angel investment tax credits were claimed
on 2,476 tax returns during the study period, for an average of $9,900 per return. This
amount is greater than the average amount claimed for more than half of Virginia’s
income tax credits in FY20 and is the most generous tax credit available to individuals,
on average. Investors can claim the credit over multiple years, and an estimated 1,400
investors claimed the credit during the study period.
Since 2017, approximately 200 businesses received investments from individuals or
businesses that claimed the angel investment tax credit. Most of the businesses are in
the professional, scientific, and technical services (45 percent), information (22 per-
cent), or manufacturing (13 percent) industries (Figure 2-1). They are also typically
“micro businesses” averaging five employees, with the vast majority (83 percent) hav-
ing fewer than 10 employees. These businesses are concentrated in Central Virginia,
with half of the businesses in Richmond, Charlottesville, Henrico, and Albemarle.
22
Science and Technology Incentives
Less than one-fifth of awards benefited businesses in Northern Virginia. (See Appen-
dix G for a map of awards by Virginia locality.)
FIGURE 2-1
Angel investment tax credit assisted-businesses are mostly in the professional,
scientific, and technical services; information; or manufacturing sectors
SOURCE: Weldon Cooper Center analysis of Virginia Tax data.
NOTE: Amounts are based on tax credits utilized between FY17 and FY20. Numbers may not sum because of round-
ing.
Businesses receiving investments from investors using the capital gains subtraction are
probably similar in employment size and industry profile to businesses whose investors
received angel investment tax credits. The definition of a “qualified business” is similar
for both incentives. However, the capital gains subtraction’s eligibility is somewhat
broader. Businesses that have been certified as high technology by the secretary of
administration or commerce and trade can qualify for the subtraction. Company
founders or other employees—investors unlikely to be influenced by incentives—can
also qualify for the capital gains subtraction, whereas they cannot for the angel invest-
ment tax credit. More detailed information about the businesses benefiting from the Funding rounds are di-
long-term capital gains subtraction generally is unknown because tax forms collect vided into stages that
very limited information about subtractions. depend on the maturity
of the business: pre-
seed, seed, and seed se-
States adopted equity investment tax incentives to support startup ries funding (Series A, B,
growth, but research indicates incentives are not effective C, and higher). Angel
and venture capital in-
Many countries and states, including Virginia, have adopted investment incentive pro- vestors recoup their in-
grams to help startup businesses grow, with angel investment tax credits being the vestments when the
most common incentive adopted by states. (See online Appendix H for more infor- business matures and
sells shares to the public
mation on state tax incentives to encourage private investment.) States adopted angel in an initial public offer-
investment tax incentives on the premise that fast-growing startup businesses are im- ing (IPO) or to another
portant to regional economic growth. company via merger or
acquisition, but do not
Startup businesses typically need multiple funding rounds to grow and be successful, recoup their investment
but startups often lack access to capital because they have too few assets to offer as if the business fails.
23
Science and Technology Incentives
collateral for conventional loan financing. Early “pre-seed” funding is often provided
by business partners, family, and friends (Figure 2-2). After these sources are ex-
hausted, equity investment can provide critical funding. Angel investors often repre-
sent a source of early stage capital, whereas venture capital funds can be a significant
funding source during later stages. Research supports the finding that equity invest-
ments, such as angel and venture capital investments, are effective in improving startup
success.
FIGURE 2-2
Multiple rounds of funding are needed for startup growth and success
SOURCE: Investopedia and Clear House Accountants.
NOTE: *Most common funder.
While equity investment is a critical funding source for startups, research shows that
tax incentives encouraging such investment have not been effective in supporting startup
growth and success. Most of the research focuses on angel investment tax credits.
Research finds that these tax credits help some startups receive additional early stage
investment but do not lead to employment growth, increased startup entry into the
market and patent activity, likelihood of later raising venture capital, or probability of
a successful exit based on an IPO or merger/acquisition.
Research concludes that angel investment tax credits have not led to startup success
because they appear to incentivize inexperienced investors who make investments in
poor performing startups or new businesses that have limited growth intentions. The
most comprehensive study on angel investment tax credits found that investments as-
sociated with the credits were made in slow-growing firms with less experienced own-
ers. Just over 6 percent of angel tax credit investors had previous entrepreneurial ex-
perience compared with 55 percent of angel investors generally (based on past stud-
24
Science and Technology Incentives
ies). This finding suggests that the angel investors receiving tax credits lacked the ex-
perience to identify businesses with fast-growing potential and to provide mentorship
and guidance to business management.
Little evidence exists on the effectiveness of incentives like the capital gains and ven-
ture capital subtractions, but related studies suggest that Virginia’s capital gains sub-
traction and venture capital subtraction (if it had been used) likely have small effects.
Virginia’s angel investment tax credit and capital gains subtraction
likely have had little impact on business startup growth
Virginia’s angel investment tax credit has had little impact on overall business startup
growth in the state. Startups assisted by investors receiving angel investment tax credits
have leveraged little additional private investment needed to help them grow. Data
limitations prevented a similar analysis from being conducted for the capital gains sub-
traction investments.
Spending on both these incentives is too small to have much effect on startup growth
overall. Spending on both tax incentives represents less than 0.7 percent of the $1.2
billion in angel and venture capital funding secured by Virginia-based firms in 2019.
In addition, demand for the angel investment tax credit has exceeded total available
funding each year. Therefore, the credit has been prorated each year during the study
period, and investors have received less than they are eligible for.
Even if funding increased, the tax incentives would likely still have little impact on
business startup growth because they are not designed to target startups with growth
potential. According to stakeholders, Virginia lacks an adequate number of startups
with growth potential that are attractive to experienced investors, and they believe this
is why Virginia lags many states in attracting angel and venture capital. Virginia ranked
20th among states in attracting pre-seed and seed capital investment (often provided by
angel investors) in 2019 and 19th in venture capital activity as a percentage of GDP in
2020.
Virginia’s angel investment tax credit has leveraged little additional private
investment to help businesses grow
Startup businesses whose investors benefited from angel investment tax credit invest-
ments between 2017 and 2020 received limited follow-up investment, according to
investment information. Angel investment tax credit-related businesses received $64.7
million in private investment related to the credits between FY17 and FY20, according
to tax form information. These startups were identified in a national investment data-
base, which indicated these businesses received $62 million in total investment (includ-
ing tax credit-assisted investment and other investment). While this database may ex-
clude some smaller investments, the information likely means these startups did not
receive substantial additional investments beyond the amount reported on tax forms
related to the credits. (See Appendix B for more detail about the analysis.)
25
Science and Technology Incentives
The angel investment tax credit also has a lower leverage factor (total spending lever-
aged by the incentive) than other state investment programs. Investors received $20
million in angel investment tax credits, which may have led to $64.7 million in private
investment for the tax credit-assisted startups between FY17 and FY20, resulting in a
leverage factor of 3.2 ($64.7 million/$20 million). In comparison, the state’s Growth
Acceleration Program Funds and Commonwealth Research and Commercialization
Fund investment programs (next chapter) had leverage factors of 16.1 and 7, respec-
tively, between FY17 and FY20.
Virginia’s equity investment incentives are not well designed to encourage
investment in startups with growth potential
Virginia’s equity investment tax incentives are not well designed to ensure investments
are made in startups with growth potential. These incentives are not targeted at pro-
fessional investors, with the exception of the venture capital subtraction, which has
not been used (Table 2-2). Research indicates equity investment incentives should be
targeted to professional, experienced investors who can select firms with greater inno-
vative potential, tend to invest over longer time horizons (patient capital), and can
provide mentorship to company founders. Investment from company insiders and
family members can qualify for the capital gains subtraction, and research indicates
these investors would invest without incentives.
TABLE 2-2
Virginia’s equity investment incentives are missing some features to encourage
investment in startups with growth potential
Feature Angel investment Long-term capital Venture capital
tax credit gains subtraction subtraction
Investor requirements
Professional investor 0 0 4
Company insider exclusion 4 6 4
Patient capital investment 4 6 4
Business requirements
Small size 4 4 0
High technology sector 4 4 0
Innovative/has growth potential 0 0 4
Bonus for university/public good 6 0 0
Prior investment cap 4 0 0
General incentive requirements
Program cap 4 0 0
Expiration date 0 6 4
SOURCE: Weldon Cooper Center analysis of program statutes and Virginia Tax guidelines.
Legend: 4 Meets criteria 6 Partially meets criteria 0 Does not meet criteria
The incentives are also not effectively targeted to the appropriate businesses. Qualify-
ing businesses for equity investment incentives should be relatively new, have funding
26
Science and Technology Incentives
constraints, be innovative and have growth potential, and generate potential spillover
effects benefiting the public at large. The angel investment tax credit generally meets
some of the criteria for effectively targeting businesses, but neither it nor the capital
gains subtraction requires evidence that the business be innovative or have growth
potential. This may explain why some businesses, such as brew pubs, have benefited
from investments supported by the angel investment tax credit.
The angel investment tax credit also does not have an annual per taxpayer cap which,
in conjunction with a high reimbursement rate (50 percent of the investment), has
resulted in the credit being oversubscribed. This resulted in the credit having to be
prorated. Investors have not received the full amount of credits for which they were
approved, likely limiting the influence of the tax credit on investment decisions. In-
vestors have received only 63 percent of their approved tax credit amount over the
period, on average, despite increases in the credit cap over time (Figure 2-3).
FIGURE 2-3
Investors have received only 63 percent of approved angel investment tax
credit amounts between FY11 and FY20
SOURCE: Virginia Tax.
Venture capital subtraction has not been used, in part, because of certain
design features
No taxpayer has yet claimed the venture capital subtraction, which was adopted in
2017, and no venture capital fund has yet to register to become a certified venture
capital account, according to Virginia Tax. Industry stakeholders have offered several
potential explanations for the lack of use. Even though this subtraction is well tar-
geted to experienced investors and innovative or fast-growing businesses, it may be
too cumbersome to use. A venture capital fund must file multiple forms to become
27
Science and Technology Incentives
a certified venture capital account, and the associated administrative costs may be
too costly compared with the tax benefit. Also, few investors are aware of the sub-
traction because it is not marketed.
Even without these limitations, the subtraction may be too narrowly targeted, because
Virginia has few venture capital accounts that meet the eligibility requirements to be-
come certified for the subtraction. There are 11 venture capital funds in Virginia, based
on information from the National Venture Capital Association. Collectively, only 11
percent of companies listed in the portfolios of these venture capital funds are located
in Virginia. Only four funds have portfolios where at least half of the companies are
based in Virginia, which is a requirement for the subtraction.
Equity investment tax incentives have negligible economic benefits
Economic impact
analysis of incentive
and returns in state revenue
spending between FY11 The angel investment tax credit and capital gains subtraction are estimated to have
and FY20 was conducted
generated economic losses for the state between FY11 and FY20 (Table 2-3). Together
using economic model-
ing software developed the incentives only generated one additional job and generated small losses in Virginia
by REMI, Inc. GDP and personal income annually during the study period. This net impact to Vir-
(See Appendix L for the ginia’s economy occurred because the increase in taxes to pay for the tax incentives
economic impact analy- was greater than the small amount of jobs, Virginia GDP, and personal income gen-
sis used in this study.) erated by the incentives. Contributing to the small economic impact is the fact that the
incentives reduce the cost of capital to the business but, unlike many incentive grants
and some tax credits, do not require any job creation or increase in other forms of
economic activity in return for receiving incentive funding. (Economic impact infor-
mation is not available for the venture capital subtraction because it has not been used.)
When assessed per $1 million spent on incentives, the economic benefits of the angel
investment tax credit and long-term capital gains subtraction are negligible compared
with the economic benefits across other incentives. (See Appendix C for more detail
on the comparison of economic benefits and the returns in revenue generated by Vir-
ginia incentives.) Both incentives generate fewer than 10 jobs, less than $1 million in
Virginia GDP, and less than $1 million in personal income for every $1 million spent
on the incentives. These estimates are far less than the economic benefits per $1 mil-
lion spent on the average incentive, which are estimated to be an additional 78 jobs,
$14 million in Virginia GDP, and $7 million in personal income. However, these esti-
mates are similar to the economic benefits per $1 million spent on the average tax
credit. (See Economic Development Incentives 2020, JLARC.)
28
Science and Technology Incentives
Table 2-3
Equity investment incentives have negligible economic benefits and returns in
state revenue (FY11–FY20)
Annual average FY11–FY20
Angel investment Long-term capital
tax credit gains subtraction
Net impact to Virginia economy
Private employment 1 job 0 jobs Net impact is the
Virginia GDP ($1.3M) ($0.8M) increase in economic
Personal income ($0.4M) ($0.1M) activity induced by the
Impact to Virginia economy per $1 million of incentives incentives after adjusting
Private employment 8 jobs 8 jobs for the opportunity cost
Virginia GDP $0.5M $0.3M of increasing taxes to
Personal income $0.6M $0.9M pay for the incentives.
Impact to state revenue (See online Appendix M
Total revenue $0.04M $0.02M for information on the
Incentive awards $2.45M $1.11M total economic impact
Revenue net of awards ($2.41M) ($1.08M) and the opportunity cost
Return in revenue 2¢ for every $1 spent 2¢ for every $1 spent of increasing taxes.)
SOURCE: Weldon Cooper Center economic impact analysis of amount of incentive spending between FY11 and FY20.
NOTE: Includes direct, indirect, and induced impacts. Gross impact on Virginia’s economy is used to calculate impact
per $1 million in incentive awards. This is consistent with how the economic development research literature typically
calculates these impacts. (See Appendix M for detailed results on total impact of the incentives, impact of raising
income taxes by the amount of the incentives [opportunity cost], and revenue generated by source.) The venture
capital subtraction is not reported because no taxpayers used it during the study period.
The returns in state revenue for every $1 spent on the equity investment incentives is
also negligible compared with the return in revenue across other incentives. Each in-
centive generates only 2¢ per $1 spent compared with 44¢ per $1 spent for the average
incentive. The return in revenue is also lower than the return in revenue generated by
the average tax credit (5¢ per $1 spent).
Angel investment tax credit should be eliminated
Virginia’s angel investment tax credit should be eliminated because of its lack of ef-
fectiveness. Nine other states with angel investment tax credits have allowed their tax
credits to expire, and some reported letting them do so because they were ineffective.
A literature review indicates that angel investment tax credits have not improved
startup outcomes such as employment and innovation because investments are made
in lower-performing firms. The economic benefits and returns in state revenue be-
cause of the tax credit are negligible and lower than many other tax credits evaluated
in this series. Even if the tax credit were better targeted to experienced investors, they
may not use it: other factors influence experienced investors’ investment decisions
more than tax credits. Some experienced investors report applying for angel tax credits
is too much of an administrative burden.
If the General Assembly eliminated the angel investment tax credit, consideration
could be given to allocating all or a portion of the $5 million tax credit cap to other
29
Science and Technology Incentives
entrepreneurial programs, particularly programs that invest directly in startups. Re-
search and development grant programs, accelerators, and new venture competitions
New venture competi-
have shown promise in multiple studies. Virginia currently has similar incentive
tions are certification,
education, and financing programs, including programs administered by the Virginia Innovation Partnership
forums hosted by uni- Corporation (see next chapter) and the Small Business Investment Grant administered
versities, foundations, by the Virginia Small Business Financing Authority. However, if the tax credit funding
governments, corpora-
is allocated to the Small Business Investment Grant, the General Assembly should
tions, and other organi-
zation at which founders consider making changes to the program that were recommended or suggested in
present or “pitch” their Workforce and Small Business Incentives (JLARC 2018). These changes include to
technologies and busi-
ness models to a panel • adopt a scoring system to better target awards to businesses more likely to
of judges. have high economic impact and
• transfer the administration of the grant to a more appropriate agency, like the
Virginia Innovation Partnership Corporation, which has other programs to en-
courage high-tech startup growth in the state.
RECOMMENDATION 5
The General Assembly may wish to consider eliminating the Qualified Equity and
Subordinated Debt Investments Tax Credit by repealing § 58.1-339.4 of the Code of
Virginia.
If the General Assembly chooses not to eliminate the angel investment tax credit, the
tax credit should be changed to better target innovative, fast-growing businesses and
incorporate other optimal incentive design features. These changes would better align
the credit with best practices for effective incentives, although the credit may remain
largely ineffective if it does not encourage investors to make investments they other-
wise would not. Priority should be given to two changes:
• Better target the tax credit to innovative, fast-growing businesses – This
could be accomplished in several ways: (i) restricting the tax credit to profes-
Certified or accredited sional or experienced investors more likely to invest in these businesses by
investors are individuals
requiring them to be certified or accredited investors or requiring a minimum
with annual income of at
least $200,000 and a net investment, such as $25,000; (ii) requiring “qualified businesses” to hold intel-
worth of at least $1 mil- lectual property, like a patent, or have received prior funding from an angel
lion (U.S. Securities and investor group or startup accelerator; and (iii) moving eligibility determination
Exchange Commission).
for the tax credit from Virginia Tax to an organization that has an entrepre-
neurial innovation mission and could better market the incentives, such as the
Virginia Innovation Partnership Corporation, which administers other angel
and venture capital assistance funds. Better targeting may improve the eco-
nomic benefits of the tax credit.
• Include an expiration date in statute for the tax credit – The expiration
date for the angel investment tax credit could be set to July 1, 2025, which
would be consistent with the expiration date of other Virginia tax incentives.
30
Science and Technology Incentives
Expiration dates are a recommended best practice for economic development
incentives because they encourage legislatures to evaluate whether incentive
programs should be extended, altered, or allowed to expire.
Consideration should also be given to additional changes:
• Reducing the reimbursement rate to lessen proration of the tax credit –
The reimbursement rate for the tax credit could be reduced from 50 percent
to between 25 and 33 percent of eligible investments. Given demand for the
credit between FY11 and FY20, a 25 percent reimbursement rate would have
eliminated oversubscription of the tax credit in all but one year. This change
would provide more certainty to investors on the amount they will receive,
thereby increasing the attractiveness of the credit. It would also bring the rates
in line with other states.
• Requiring businesses to attest that tax credits are needed and incentiv-
izing them to remain in Virginia for a designated period – Qualifying
businesses could be required to attest that angel investment tax credits are
needed to encourage investment in the business. Investors or businesses could
be required to pay a penalty if the qualified business moves outside the state
within a designated timeframe of receiving the benefit. Other Virginia incen-
tives and other states’ equity investment incentives have these requirements.
Investment periods for long-term capital gains subtraction and
venture capital subtraction should not be renewed
The time periods for which investments qualify for the capital gains subtraction ended
in 2020, and the venture capital subtraction ends in 2023; these investment periods
should not be renewed by the General Assembly. The capital gains subtraction appears
to have been adopted as a temporary measure to encourage business investment during
the Great Recession, and the economic benefits generated by the subtraction are neg-
ligible. The venture capital subtraction has not been used, and it is unlikely to be used
in the future because there are few eligible venture capital fund companies located in
Virginia. Minimal empirical evidence is available to show that incentives similar to the
capital gains and venture capital subtractions are effective in stimulating new equity
investment.
RECOMMENDATION 6
The General Assembly may wish to consider not renewing the investment periods for
the (i) long-term capital gains subtraction, which ended June 30, 2020, and (ii) venture
capital subtraction, which will end December 31, 2023.
31
Science and Technology Incentives
NOTE: Beneficiaries are unduplicated estimates of businesses. Federal research and development grants are awards from the federal Small
Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs.
32
Science and Technology Incentives
3. Direct Financial Incentives for Startups
Virginia offers two programs that provide financial assistance directly to startups to
The Virginia Innovation
encourage their growth and innovation. The Growth Acceleration Program Funds Partnership Corporation
(GAP Funds) make early, seed-stage equity investments in small, Virginia-based tech- (VIPC) was created in
nology and life sciences companies with high growth potential. The Commonwealth 2021 after legislation in
2020 merged the Inno-
Research Commercialization Fund (CRCF) program provides grants to small, high
vation and Entrepre-
technology companies to help bring the products and services they are developing to neurship Investment Au-
market (Table 3-1). Both programs are administered by the Virginia Innovation Part- thority and Virginia Re-
nership Corporation (VIPC). The programs were rebranded in 2021 and, because this search and Investment
change occurred after the study period for this report, this report refers to the pro- Committee into the Vir-
ginia Innovation Partner-
grams by their previous names. (The GAP Funds program has been renamed Virginia ship Authority.
Venture Partners, and CRCF has been combined with another program and renamed VIPC is the nonprofit op-
the Commonwealth Commercialization Fund.) erating arm for the Vir-
ginia Innovation Partner-
Like venture capital incentives, the GAP Funds and CRCF programs are designed to
ship Authority and was
support startup growth, but the financial assistance goes directly to the business. A key formerly known as the
goal of both the GAP Funds and CRCF programs is to help make startups more Center for Innovative
attractive for follow-up private investment that will help them grow. Technology (CIT), which
was the operating arm
For the GAP Funds program, VIPC serves as an “angel investor.” VIPC has an equity of the Innovation and
stake in the company and assists in company development through its status as a board Entrepreneurship Invest-
ment Authority. CIT was
member and advisor. VIPC recovers its funds when the company is sold, goes public,
rebranded as VIPC in
or moves from the state but loses its investment when the business fails. Thus, the 2021 to reflect its ex-
program can potentially become self-sufficient over time by reinvesting the proceeds panded mission.
in new ventures, similar to a revolving loan fund. To date, some of the proceeds have Programming changes
been transferred to other related programs, such as the new Virginia Founders Fund, also occurred in 2021.
which is designed to provide startup funding for underrepresented demographics and The GAP Funds program
became Virginia Venture
regions. Partners, and the Com-
A key feature of the CRCF program is to provide grant funding to Virginia-based monwealth Research
Commercialization Fund
recipients of federal Small Business Innovation Research (SBIR) and Small Business became the Common-
Technology Transfer (STTR) grants. The SBIR/STTR programs are highly competi- wealth Commercializa-
tive federal grant programs that encourage domestic small businesses to help meet tion Fund.
federal research and development needs. The programs are similar, but SBIR grants This evaluation does not
are awarded to startups operating on their own, and STTR grants are awarded to capture the agency con-
solidation and program-
startups that are collaborating with university-affiliated researchers. Both programs
matic changes that oc-
also provide Phase I awards for concept development and Phase II awards that further curred in 2021, because
support prototype development. The STTR program fosters technology transfer the study period ends in
through cooperative R&D between small businesses and research institutions and spe- FY20.
cifically requires formal collaboration between business awardees and a research insti-
tution.
33
Science and Technology Incentives
TABLE 3-1
Virginia offers two programs that provide financial assistance directly to startups to
encourage their growth and innovation
Growth Acceleration Program Fund (GAP Funds; became Virginia Venture Partners in 2021)
(established 2004)
Purpose Promote expansion of early stage companies in targeted fields with rapid growth potential.
Eligibility Virginia-based technology, green technology, and life science companies with a high-growth
potential.
Program Series of equity funds managed by Virginia Innovation Partnership Corporation (VIPC). VIPC makes
features seed-stage investments in eligible Virginia-based firms, or firms willing to relocate to Virginia.
Investment averages $125,000 and may be in combination with other private investors.
Investment decisions are made on competitive basis, with screening and selection by VIPC staff,
private sector experts, and VIPC’s Investment Advisory Board, which includes regional venture
capitalists, angel investors, and entrepreneurs.
VIPC staff conduct due diligence and evaluate the quality and creativity of the company’s
management team, business plan, potential to leverage additional angel capital and venture
investment, proprietary advantage of business model, technology development approach or
intellectual property, and ability to grow rapidly.
Commonwealth Research Commercialization Fund (CRCF; became part of Commonwealth
Commercialization Fund in 2021) (adopted 2009 with first awards in FY12)
Purpose Promote high technology economic development through commercialization of promising research
and development.
Eligibility Companies developing technologies in target industry sectors identified by the Commonwealth
Research and Technology Strategic Roadmap (now Innovation Index) at the time of application, such
as life sciences, cybersecurity, advanced manufacturing, energy, and unmanned systems.
Program Grants are made through several subprograms a to support early-stage technology development,
features including assistance with bringing the technology to market and making it attractive for further
investment and licensing.
Commercialization Program: grants (average award $65,000) are made to companies on the basis of
scientific merit and economic development potential for technology at the proof-of-concept stage
or earlier to support product validation and commercialization efforts. Funds must be matched by
recipient.
SBIR/STTR matching funds program: grants (average award $53,000 b) are made to Virginia-based
businesses that have recently won a federal Phase I and/or Phase II Small Business Innovative
Research (SBIR) or Small Business Technology Transfer (STTR) award to further accelerate high-
potential technology development and commercialization efforts.
Multi-stage application process by which applications are reviewed by VIPC staff to ensure
compliance with program guidelines, scored by subject matter experts, evaluated and scored by an
advisory committee, and ultimately selected by VIPC board of directors.
SOURCE: Weldon Cooper Center review of the Code of Virginia and agency documents.
NOTE: Authorized by §§ 2.2-2355 and 2.2-2359 of the Code of Virginia.
a
The Eminent Researcher and Matching Funds Program with Virginia colleges and universities do not provide funding for businesses and are
not included in this review. b Minimum award amounts increased from $50,000 to $75,000 in FY20. Other states have similar programs, see
Appendix J for more information.
34
Science and Technology Incentives
Startups received $5 million in GAP Funds investments and CRCF
grants in FY20
Startup businesses received nearly $35 million in GAP Funds investments and CRCF
grants during the 10-year period from FY11 to FY20, including $5 million in FY20.
(This is similar to the amount of tax incentives private investors received from the
angel investment tax credit and capital gains subtraction over this period.) GAP Funds
investments make up nearly two-thirds of the funding (62 percent).
Nearly 340 companies benefited from the two programs over the 10-year period, with
the GAP Funds program benefiting slightly more companies. Like other incentives in
this report, the vast majority of awards from both programs has been to startups in
the professional, technical, and scientific services industry sector (Figure 3-1), with
another 19 percent of GAP Funds investments (only 4 percent for CRCF awards) to
software design and cybersecurity firms in the information sector.
FIGURE 3-1
Vast majority of GAP Funds and CRCF awards has been to startups in the
professional, technical, and scientific services industry sectors (FY11–FY20)
SOURCE: Weldon Cooper Center analysis of VIPC program data.
NOTE: Calculations based on 145 CRCF and 162 GAP Funds awards.
Both GAP Funds and CRCF awards are targeted to small startup firms, with CRCF
awards going to the smallest companies of any Virginia grant program. Both programs
target early-stage startup companies, with CRCF awards generally targeted at the ear-
liest stages. The average size of companies receiving CRCF awards is 4.1 employees,
and the average size of companies receiving GAP Funds investments is 6.5.
The GAP Funds and CRCF program are among the most geographically concentrated
of Virginia’s incentive programs, with startups in Arlington and Fairfax counties re-
ceiving 65 percent of GAP Funds investments. In addition to Northern Virginia,
CRCF awards are clustered to companies near the University of Virginia and Virginia
35
Science and Technology Incentives
Tech, two of Virginia’s public research universities. (See online Appendix I for maps
of awards by locality.)
GAP Funds and CRCF programs appear to help startups innovate and
grow
Evidence suggests Virginia’s GAP Funds and CRCF programs help startup businesses
innovate and grow. Several design features likely lead to the effectiveness of both pro-
grams, according to research (though the research mostly focuses on effective design
features for direct investment funds). VIPC has historically collected and reported out-
come measures for both programs and has made program improvement and data col-
lection revisions over time. VIPC provides advice and support to businesses in both
programs and helps oversee the management of businesses in GAP Funds companies
through its status as a board member and adviser. Both programs also have additional
features that research indicates can contribute to their success, including being oper-
ated through a third-party entity, having local entrepreneurs involved in award selec-
tion, and employing managers with extensive networks and contacts at entrepreneurial
support organizations.
Research on investment fund programs supports their effectiveness and finds
commercialization programs improve firm performance in some areas
Only a few peer-reviewed studies on the effects of government-supported investment
funds exist, but they generally find that programs, like the GAP Funds program, which
receive both government venture capital and private venture capital are successful.
One study found that firms receiving both government venture capital and private
venture capital received more venture investment than those funded by private venture
capitalists alone. Another study found that private venture or mixed investment funds
programs, like the GAP Funds program, were more successful than public direct in-
vestment funds in selecting the most promising startups or providing the additional
services like managerial assistance that foster success.
Some research indicates commercialization programs can improve some performance
measures but not all. Several recent empirical studies examining the effect of the fed-
eral SBIR/STTR programs, and their associated state match programs like the CRCF,
found these programs generally resulted in increased likelihood of obtaining Phase II
awards, higher employee wages, improved firm survival, and greater ability to attract
capital. However, firm employment levels do not generally increase, and in some cases
actually decrease, because program guidelines encourage collaborative outsourcing of
R&D work. Available empirical evidence for other state commercialization programs
is much more limited, perhaps because commercialization assistance is delivered more
frequently by universities than statewide programs, and existing state programs are
fairly diverse.
36
Science and Technology Incentives
GAP Funds and CRCF projects leverage additional private investment to help
businesses grow
Virginia’s GAP Fund and CRCF programs appear to help startup businesses innovate
and grow. Both programs report fairly high investment leverage rates for assisted pro-
jects, meaning projects have received additional private investments. VIPC reports lev-
erage rates of 45.8 for the GAP Funds and 43.0 for the CRCF programs between
FY11 and FY20, meaning that for every $1 in investment, GAP Funds projects re-
ceived an additional $46 in private investment, and CRCF projects received $43 in
additional investment.
GAP Funds projects also perform well on other outcome measures. VIPC estimates
that invested GAP Funds to date have a projected capital return factor of 1.6, meaning
that returns are expected to exceed invested amounts by 60 percent. Businesses that
received GAP Funds investments between FY11 and FY20 also have a lower failure
rate than national estimates for startup companies. Sixteen percent of GAP Fund pro-
jects failed over the 10-year period compared with national estimates that 21.5 percent
of startups fail in the first year, 30 percent in the second year, 50 percent in the fifth
year, and 70 percent in their 10th year.
CRCF program has likely helped the state remain competitive for federal
SBIR/STTR awards, but creation of university-based startups lags other
states
The CRCF program may have helped Virginia remain competitive in receiving federal
SBIR/STTR awards to promote research and development (Figure 3-2). (Approxi-
mately half of CRCF awards are used as a state match for the SBIR/STTR programs.)
Virginia has historically drawn a high share of SBIR/STTR funds relative to state
GDP, ranking fifth between 1996 and 1998. Since 2011, when the CRCF program
began making awards, Virginia’s growth rate (52 percent) for SBIR/STTR has been
lower than the nation’s (68 percent), but this is likely because several states introduced
new SBIR/STTR match programs to increase their state businesses’ competitiveness
in receiving these awards. However, the CRCF awards likely helped Virginia keep pace
during this time. Virginia still ranked sixth in SBIR/STTR awards per state GDP as of
the 2016–2017 period.
37
Science and Technology Incentives
FIGURE 3-2
CRCF program may have contributed to Virginia’s increase in federal
SBIR/STTR awards after 2011
SOURCE: Small Business Administration, SBIR/STTR Awards (https://www.sbir.gov).
The CRCF program has not enhanced or expanded the commercialization of univer-
sity-based research as indicated by low creation of new university-based business
startups. Startup projects receiving STTR grants are required to partner with research
institutions. State performance in university-generated startups has lagged the national
average since CRCF was established. Virginia currently ranks 36th among states with
a rate of 0.56 startups per 100,000 residents, which is half of the national rate of 1.14.
A national consultant and stakeholders cite several reasons for Virginia’s relatively low
prevalence of university-based startups, including inconsistent university policies for
intellectual property, restrictions on university infrastructure sharing with business
partners, inadequate pipeline of commercialization prospects, and deficiencies in en-
trepreneurship support. The CRCF program, however, has a limited ability to address
these problems alone.
GAP Funds program generates high economic benefits, but economic
benefits of CRCF program are low
Economic impact
analysis of incentive The GAP Funds and CRCF programs are estimated to have generated additional eco-
spending between FY11 nomic activity for the state between FY11 and FY20. The GAP Funds program ac-
and FY20 was conducted counted for the majority of the activity. Estimates show that each year private sector
using economic model-
ing software developed
employment increased by 43 jobs, state GDP increased by $8 million, and statewide
by REMI, Inc. personal income increased by $5 million because of the program. The CRCF program
(See Appendix L for the also generated additional economic activity, but less than the GAP Funds program
economic impact analy- (Table 3-2). Estimates are based on employment growth for startup companies that
sis used in this study.) had completed all funding requirements. (See Appendix B.)
38
Science and Technology Incentives
Table 3-2
GAP Funds program generates high economic benefits, but economic benefits
of CRCF program are low (FY11–FY20)
Annual average FY11–FY20
GAP Funds CRCF
Net impact to Virginia economy
Private employment 43 jobs 20 jobs
Virginia GDP $8.4M $4.1M
Personal income $4.8M $2.2M
Impact to Virginia economy per $1 million of incentives
Private employment 274 jobs 36 jobs
Virginia GDP $52.8M $7.0M Net impact is the
Personal income $30.5M $4.0M increase in economic
Impact to state revenue activity induced by the
Total revenue $0.3M $0.2M incentives after adjusting
Incentive awards $0.2M $0.7M for the opportunity cost
Revenue net of awards $0.1M ($0.5M) of increasing taxes to
Return in revenue $1.66 for every $1 spent 23¢ for every $1 spent pay for the incentives.
SOURCE: Weldon Cooper Center economic impact analysis of amount of incentive spending between FY11 and FY20. (See Appendix M for in-
NOTE: Includes direct, indirect, and induced impacts. Gross impact on Virginia’s economy is used to calculate impact formation on the total
per $1 million in incentive awards. This is consistent with how the economic development research literature typically economic impact and
calculates these impacts. (See Appendix M for detailed results on total impact of the incentives, impact of raising the opportunity cost of
income taxes by the amount of the incentives [opportunity cost], and revenue generated by source.) Annual average increasing taxes.)
program spending for the GAP Funds program reflects recouped investments which are reinvested in the program.
The economic benefits and returns in state revenue of the GAP Funds program are
high compared with Virginia’s other incentives. The GAP Funds program has similar
economic benefits and returns in revenue as the VALET Program and Trade Show
Assistance Program, which have the highest economic benefits and returns in state
revenue of the incentives evaluated in this report series to date (excluding four revolv-
ing loan programs, which have almost no cost to the state). When assessed per $1
million spent on incentives, the GAP Funds program generated 274 additional jobs,
$53 million in additional state GDP, and $31 million in additional statewide personal
income each year between FY11 and FY20. Its return in revenue each year is $1.66 per
$1 spent, meaning that the program more than pays for itself.
The GAP Funds program has high economic benefits and returns in revenue for two
reasons. The program provides relatively small amounts of equity investment (an av-
erage of $125,000) in typically fast-growing firms. The program is also partially self-
funding (like loan programs), because proceeds from the sale, move (invoking a “claw-
back”), or public offering of a company in the program can be used to fund future
equity investments. (See online Appendix L for the methodological assumptions used
in this analysis.)
The CRCF program has low economic benefits and returns in state revenue compared
with other incentives. When assessed per $1 million spent, the CRCF program gener-
ates 36 additional jobs, $7 million in additional state GDP, and $4 million in additional
39
Science and Technology Incentives
statewide personal income each year between FY11 and FY20. These results are lower
than the average incentive, which is estimated to have generated an additional 78 jobs,
$14 million in Virginia GDP, and $7 million in personal income for every $1 million
spent. The return in revenue each year for the CRCF program is only estimated to be
23¢ for every $1 spent compared with 44¢ for every $1 spent for the average incentive.
The CRCF program’s low economic benefits and return in revenue are primarily be-
cause CRCF grant recipients are slow-growing firms that experienced low levels of
employment growth compared with GAP Funds projects. (This analysis is based on
matching completed projects with employment records.) Some firms that received
CRCF assistance did not grow at all. This finding is consistent with the research liter-
ature that found that state SBIR/STTR match programs (for which half of CRCF
funds are used) do not stimulate firm employment growth. This may be because these
businesses are more likely to contract out research-related activity, or because these
businesses are more focused on developing viable technology that can be sold to other
firms rather than building a long-term business.
Substantive changes do not appear necessary for the GAP Funds and
CRCF programs at this time
Substantive changes do not appear necessary to the GAP Funds and CRCF programs
(now the Virginia Venture Partners and Commonwealth Commercialization Fund
[CCF] programs, respectively). Both programs are well designed, and assisted projects
have leveraged additional private investment to help them grow. The GAP Funds pro-
gram is estimated to have generated high economic benefits. While the CRCF program
is estimated to have generated low economic benefits, this result is likely because pro-
jects had lower job growth. VIPC staff indicated they are taking steps to address this
by broadening the targeted industries eligible for the CCF program beyond the tar-
geted industry sectors identified by the Commonwealth Research and Technology
Strategic Roadmap (now the Innovation Index), which has narrowed over time, and
by allowing exceptions to the targeted industry criteria for innovative, fast-growing
projects.
40
Science and Technology Incentives
4. Space Tax Incentives
Virginia offers three tax incentives that support increased space flight activities in the
state. Spaceflight activity in Virginia occurs at Virginia’s Mid-Atlantic Regional Space- The Virginia Commer-
port (MARS) operated by the Virginia Commercial Space Flight Authority (Virginia cial Space Flight Au-
Space). The Virginia Spaceport Users Exemption (spaceport exemption), which was thority (Virginia Space)
established in 1997, allows companies to purchase, lease, or use tangible goods used was created by the Gen-
eral Assembly in 1995 to
for spaceport activity at MARS tax free. The other two tax incentives were created as promote commercial
part of Virginia’s “Zero Gravity, Zero Tax Act,” which were passed by the 2008 Gen- space activity, economic
eral Assembly and allow space flight companies to subtract income earned from eligi- development, and aero-
ble space launch activities at Virginia airports or spaceports from their taxable income space research within
the Commonwealth.
(Table 4-1). Companies can subtract income earned from
Virginia Space began
• launching people to space or launch services that either provide people with leasing the Wallops Is-
space flight training or simulate the space flight experience (Zero G human land Flight Facility on the
Eastern Shore in 1997 to
flight subtraction) and form the Mid-Atlantic
• service contracts with NASA to resupply the International Space Station (Zero Regional Spaceport
G resupply subtraction). (MARS).
In 1995, NASA was con-
The Zero G human flight subtraction has not yet been used and is unlikely to be used sidering closing the Wal-
in the near future, according to stakeholders. lops Island Flight Facility
in response to a de-
Stakeholders indicate the incentives were established to enhance the competitiveness crease in NASA flight ac-
of the MARS spaceport and “level the playing field” with other states, such as Florida, tivity and government
which were also introducing space launch incentives. U.S. space launches were con- policy favoring commer-
ducted almost exclusively by NASA, the military, and other federal agencies until the cialization of space
launches. Virginia re-
adoption of the federal Commercial Space Launch Act (1984) and the discontinuation portedly created Virginia
of the space shuttle program in 2011. Since 2011, NASA and other federal agencies Space to avoid closure
have relied on private commercial contractors to provide space launch services, and of the Wallops Island fa-
states have increasingly created space flight authorities and incentives to attract space cility.
launch companies.
41
Science and Technology Incentives
42
Science and Technology Incentives
TABLE 4 -1
Virginia offers three tax incentives to promote spaceport operations in Virginia
Virginia Spaceport Users Exemption (spaceport exemption) (established 1997)
Purpose Promote spaceport operations in Virginia.
Eligibility Companies that perform spaceport activities at the Mid-Atlantic Regional Spaceport (MARS).
Program features Items exempt from sales and use tax include space vehicles, equipment on space vehicles, fuel for
space vehicles, and machinery used for maintaining and developing space vehicles. Items have to be
purchased in Virginia or subject to the use tax and used or consumed at MARS.
Spaceport activities broadly mean activities directed or sponsored at a facility owned, leased, or
operated by or on behalf of the Virginia Commercial Space Flight Authority. The exemption does not
apply to launch activities at the federal National Aeronautics and Space Administration (NASA)
Wallops Flight Facility that are not leased or operated by Virginia Space.
The exemption is still available if the launch fails, is postponed, or is canceled.
Zero G Zero Tax Act Income Tax Subtractions (Zero G human flight subtraction and Zero G
resupply subtraction) (adopted 2008)
Purpose Encourage the location and expansion of companies at a Virginia airport or spaceport involved in (i)
flying or training humans in suborbital flight or (ii) involved in resupplying the International Space
Station (ISS).
Eligibility Launch or space flight services must be provided at a Virginia airport or spaceport.
Companies must have a contract with NASA to resupply the ISS to use the resupply subtraction.
Program features Income tax subtraction that allows space flight companies to subtract income earned from eligible
space flight activities from their taxable income.
Companies can use the Zero G human flight subtraction if they provide individuals the training or
experience of space flight, without performing an actual launch.
SOURCE: Weldon Cooper Center review of the Code of Virginia and agency documents.
NOTE: Authorized by §§ 58.1- 322(C)(33,34), 58.1-402(C)(22,23), and 58.1-609. 3(13) of the Code of Virginia.
Companies saved $1.1 million in income and sales taxes in FY20
because of space tax incentives
Virginia’s commercial space-related companies are estimated to have saved $6.7 million
in state income and sales taxes during the 10-year period from FY11 to FY20, and $1.1
million in FY20. Nearly all of the savings went to space-related companies that used
the spaceport exemption. The beneficiaries of these tax incentives are space flight
companies, such as Northrop Grumman (previously Orbital Sciences), and their sup-
pliers and subcontractors that support spaceport activities at MARS.
Savings from the tax incentives are relatively small because there were only 14 launches
during the 10-year period, or about one launch per year. The bulk of spaceport spend-
ing attributable to the spaceport exemption likely occurs during launch preparation,
which is one to two months prior to the launch, according to stakeholders. Use of the
Zero G resupply subtraction is dependent on income from this small number of
launches and the profitability of the launch providers.
43
Science and Technology Incentives
Use of the spaceport tax exemption should increase in the future because Rocket Lab,
a space launch provider, recently selected MARS as the launch site for its Electron
rocket and the location to manufacture, operate, and launch its Neutron rocket. Rocket
Lab launched its Electron rocket in February 2022 and expects to launch its Neutron
rocket beginning in 2024. Therefore, Rocket Lab and the suppliers and subcontractors
it uses for activities at MARS may begin using the spaceport exemption in FY22. The
FAA estimates that commercial space launch activity will grow and other space flight
companies may choose to launch from MARS, which may increase use of the exemp-
tion.
Use of the Zero G subtractions is not expected to increase. Rocket Lab does not have
a contract with NASA to supply the ISS and cannot use the Zero G resupply subtrac-
tion. It could potentially use the Zero G human flight subtraction because the Neutron
rocket is capable of human space flight, but the company has no plans for providing
human spaceflight at this time.
Multiple factors, including other Virginia incentives, have greater
influence on space activity than the space tax incentives
Space launch location decisions are influenced by several factors, according to research
and stakeholders. These factors, specifically spaceport infrastructure and location and
other forms of state support, are much more important factors in making launch lo-
cation decisions than the availability of the three space-related tax incentives.
MARS has infrastructure and location advantages that are attractive for
space flight activity
MARS offers several notable advantages as a launch site. MARS is operated by a state
spaceport authority, Virginia Space, which can issue bonds to help fund the capital
expense of infrastructure development. The estimated cost of building a commercial
spaceport is more than $200 million. The FAA reports the ability to issue bonds is the
most important economic development tool for commercial launch sites because of
the high capital costs.
MARS also has multiple infrastructure advantages. It has vertical launch facilities for
launching payloads into orbit, which places it in competition with only three other
spaceports nationally (Cape Canaveral in Florida, Pacific Spaceport Complex in
Alaska, and Vandenberg Spaceport in California). As one of the first U.S. commercial
spaceports, MARS has already developed considerable infrastructure. It currently has
three launch pads, a vehicle and payload processing integration facility, and support
instrumentation and emergency facilities.
MARS has numerous locational advantages, including
• a coastal location, which minimizes safety hazards because launch paths are
over the open ocean rather than populated areas, resulting in lower insurance
costs;
44
Science and Technology Incentives
• a good launch trajectory to serve the International Space Station and low earth
orbit;
• location in a zone that is less prone to natural disasters, such as seismic and
hurricane activity like competing facilities in Florida and California;
• access to services and personnel available at the NASA Wallops Flight Facility
through Virginia Space’s partnership with NASA; and
• proximity to the Washington, D.C., metropolitan area and its skilled workforce,
and close connections to major aerospace and defense customers.
MARS also has fewer launches each year than Cape Canaveral in Florida, its principal
competitor, which allows it to offer scheduling flexibility to space launch companies.
Virginia has provided additional support to the space flight industry that is
more influential than the space tax incentives
Virginia has provided other financial support to Virginia Space and space-launch pro-
viders that is far greater and, according to one stakeholder, has far more impact on
attracting space flight companies to MARS than the spaceport exemption and Zero G
resupply subtraction. Between FY11 and FY20
• Virginia Space received $8.5 million in bond financing in addition to its annual
operating appropriation ($15.8 million per year since FY15) and more than $50
million in appropriations for infrastructure improvements at MARS.
• Orbital Sciences, a space launch provider, received more than $28 million in
grant funding from Virginia’s Transportation Partnership Opportunity Fund
that supported infrastructure development at MARS during the 10-year period.
• Though outside the study period, Rocket Lab was awarded a $15 million cus-
tom incentive package to establish a space vehicle production facility to assem-
ble and launch Rocket Lab’s Neutron rocket, and Virginia Space received an
appropriation of $30 million for an additional launch pad in FY22.
These other state resources are far greater than the estimated $1.1 million spent per
year during the 10-year period on the spaceport exemption and the Zero G resupply
subtraction. (State subsidization is common for most spaceports, because otherwise
spaceports would have substantial operating deficits.)
In addition to financial support, Virginia has passed laws to help make MARS more
attractive to space flight companies. Virginia has adopted space-flight liability and im-
munity laws that protect space flight entities from liability for participant injury. The
liability laws are credited, in part, with the decision by Orbital Sciences (now Northrop
Grumman) to locate the launch operations for its Taurus II launch vehicle at MARS
in 2008. Virginia has also passed laws granting FOIA protection for companies when
they do business with Virginia Space.
45
Science and Technology Incentives
Space tax incentives have negligible economic benefits and negligible
returns in state revenue
The spaceport exemption and Zero G resupply subtraction are estimated to have gen-
erated economic losses for the state between FY11 and FY20. Estimates show that
each year private sector employment decreased by one job, state GDP decreased by
$0.5 million, and statewide personal income decreased by $0.1 million because of the
Economic impact tax incentives (Table 4-2). Economic losses occur because the increase in taxes to pay
analysis of incentive for the incentives was greater than the small amount of jobs, Virginia GDP, and per-
spending between FY11 sonal income generated by the incentives. Estimates for the spaceport exemption and
and FY20 was conducted
the Zero G resupply subtraction are reported together to prevent disclosure of tax-
using economic model-
ing software developed payer information, since the subtraction has very few users. Estimates are not provided
by REMI, Inc. for the Zero G human flight subtraction because it was not used during the 10-year
(See Appendix L for the study period.
economic impact analy-
sis used in this study.)
TABLE 4-2
Spaceport exemption and Zero G resupply subtraction are estimated to have
negligible economic benefits and returns in state revenue (FY11–FY20)
Annual average
FY11–FY20
Net impact to Virginia economy
Private employment (1 job)
Virginia GDP ($0.5M)
Personal income ($0.1M)
Impact to Virginia economy per $1 million of spending
Private employment 6 jobs
Virginia GDP $0.3M
Net impact is the Personal income $0.6M
increase in economic Impact to state revenue
activity induced by the Total revenue <$0.1M
incentives after adjusting Cost of incentive $0.6M
for the opportunity cost Net revenue ($0.6M)
of increasing taxes to Return in revenue per $1 spent 4¢ per $1 spent
pay for the incentives.
SOURCE: Weldon Cooper Center economic impact analysis of business activity induced by Virginia’s economic de-
(See Appendix M for in- velopment incentive programs between FY10 and FY19.
formation on the total NOTE: Includes direct, indirect, and induced impacts. Gross impact on Virginia’s economy is used to calculate impact
economic impact and per $1 million in incentive awards. This is consistent with how the economic development research literature typically
the opportunity cost of calculates these impacts. Estimates assume firm capital costs are reduced for the air transportation sector, which
includes space flight. (See Appendix M for detailed results on total impact of the incentives, impact of raising income
increasing taxes.)
taxes by the amount of the incentives [opportunity cost], and revenue generated by source.)
The economic benefits and return in state revenue of the space tax incentives are
negligible compared with the economic benefits and return in state revenue of other
incentives. When assessed per $1 million spent on incentives, the space tax incentives
generate six additional jobs, $0.3 million in additional state GDP, and $0.6 million in
additional statewide personal income each year between FY11 and FY20. The return
in revenue each year for the space tax incentives is 4¢ per $1 spent. These estimates,
46
Science and Technology Incentives
while negligible, are similar to other tax incentives evaluated in prior reports in this
series, including the sales tax exemptions for the airline and shipping industries and
the airline repair parts exemption. The economic benefits and returns in state revenue
generated by the space tax incentives are negligible because most of the components
for space flight vehicles launched in Virginia are sourced from out-of-state or interna-
tional suppliers; therefore, the industry’s multiplier effect is relatively low.
Spaceport exemption could be maintained, but the Zero G
subtractions should be eliminated
While space tax incentives have very limited impact on space activity and negligible
economic benefits, the spaceport exemption could be maintained for several reasons.
Although space launch providers can use the exemption, they report that their suppli-
ers and sub-contractors are the primary beneficiaries of the exemption. Discontinuing
the spaceport exemption would put Virginia at a disadvantage to other states with
space launch facilities—all of which have similar exemptions—at a time when Virginia
Space is trying to increase space launches. This exemption also provides similar tax
treatment to the space industry as other capital intensive industries, such as data cen-
ters, railroads, airlines, and shipbuilding.
The Zero G tax incentives should be eliminated because they are narrowly targeted at
specific types of space launch and training activities. The Zero G resupply subtraction
benefits only Virginia companies with a resupply contract for the ISS. While it likely
provides meaningful tax relief to its users, it is likely immaterial to other space launch
company decisions to locate in Virginia because very few companies have a resupply
contract. The current resupply contract for the ISS will expire in 2026, and NASA will
end operation of the ISS in 2030, further reducing the relevance of the resupply sub-
traction. The subtraction for human space-flight training has never been used, and
stakeholders expressed doubt that it would be used in the near future.
If the General Assembly wishes to continue to provide an incentive to encourage
space flight companies to locate or launch from Virginia Space, it should consider
replacing the Zero G income tax subtractions with a new, broader grant to incentivize
infrastructure development at Virginia Space. Direct assistance with infrastructure
costs seems to be the most important factor influencing MARS’s value and promi-
nence, so a capital investment grant may be more effective at influencing location de-
cisions. The new incentive could provide grant awards to space launch companies
based on a percentage of new capital investment (such as 2 percent of capital invest-
ment like Virginia’s International Trade Facility Tax Credit) or provide grants to space
launch companies that create a minimum number of jobs and a minimum capital in-
vestment in Virginia (similar to Florida’s Space Business Incentives Act.) Additional
funding beyond the cost of the resupply subtraction (well under $1 million per year)
would likely be needed to encourage additional space launch companies to locate op-
erations in Virginia (and launch from MARS). For example, several Virginia infrastruc-
ture-related grant programs for port users and companies in need of rail/road access
47
Science and Technology Incentives
improvements provide maximum awards of around $500,000 per project, though total
annual funding for the program varies.
RECOMMENDATION 7
The General Assembly may wish to consider amending §§ 58.1-322 and 58.1-402 of
the Code of Virginia to eliminate the Zero G Zero Tax income tax subtractions after
the current contract to resupply the International Space Station expires.
Virginia Space could be required to provide policymakers with more comprehensive
information on state funds spent on MARS and whether funding objectives have been
met. This would allow policymakers to understand whether the state is effectively in-
centivizing commercial space activity. The state has provided significant financial sup-
port directly to Virginia Space for MARS infrastructure, which benefits the space
launch companies that use the spaceport. However, limited information is reported
about total spending and related outcomes.
Virginia Space could be required to include in its annual report to the General Assem-
bly a summary of its six-year strategic plan that it presents to its board, how available
state funds have been spent to achieve the strategic plan goals to date, and the extent
to which the strategic plan goals have been achieved to date. According to Virginia
Space and MARS staff, its key performance measures are currently the size of its cus-
tomer base (i.e., the number and diversity of its launch customers) and the number of
launches it performs.
RECOMMENDATION 8
The General Assembly may wish to consider amending § 2.2-2213 of the Code of
Virginia to require the Virginia Commercial Space Flight Authority to include in its
annual report a summary of (i) its six-year strategic plan, (ii) how available state funds
have been spent to achieve the strategic plan goals to date, and (iii) the extent to which
the strategic plan goals have been achieved to date.
48
Appendixes
Appendix A: Study mandate
2020–2022 Appropriation Act
Passed as Chapter 552 of the Acts Assembly, April 7, 2021
§ 1-12 Item 32 F
F.1. The General Assembly hereby designates the Joint Legislative Audit and Review Commission
(JLARC) to conduct, on a continuing basis, a review and evaluation of economic development initia-
tives and policies and to make such special studies and reports as may be requested by the General
Assembly, the House Appropriations Committee, or the Senate Finance Committee.
2. The areas of review and evaluation to be conducted by the Commission shall include, but are not
limited to, the following: (i) spending on and performance of individual economic development in-
centives, including grants, tax preferences, and other assistance; (ii) economic benefits to Virginia of
total spending on economic development initiatives at least biennially; (iii) effectiveness, value to tax-
payers, and economic benefits to Virginia of individual economic development initiatives on a cycle
approved by the Commission; and (iv) design, oversight, and accountability of economic development
entities, initiatives, and policies as needed.
3. For the purpose of carrying out its duties under this authority and notwithstanding any contrary
provision of law, JLARC shall have the legal authority to access the facilities, employees, information,
and records, including confidential information, and the public and executive session meetings and
records of the board of VEDP, involved in economic development initiatives and policies for the
purpose of carrying out such duties in accordance with the established standards, processes, and prac-
tices exercised by JLARC pursuant to its statutory authority. Access shall include the right to attend
such meetings for the purpose of carrying out such duties. Any non-disclosure agreement that VEDP
enters into on or after July 1, 2016, for the provision of confidential and proprietary information to
VEDP by a third party shall require that JLARC also be allowed access to such information for the
purposes of carrying out its duties.
4. Notwithstanding the provisions of subsection A or B of § 58.1-3 or any other provision of law,
unless prohibited by federal law, an agreement with a federal entity, or a court decree, the Tax Com-
missioner is authorized to provide to JLARC such tax information as may be necessary to conduct
oversight of economic development initiatives and policies.
5. The following records shall be excluded from the provisions of the Virginia Freedom of Infor-
mation Act (§ 2.2-3700 et seq.), and shall not be disclosed by JLARC:
(a) records provided by a public body as defined in § 2.2-3701, Code of Virginia, to JLARC in con-
nection with its oversight of economic development initiatives and policies, where the records would
not be subject to disclosure by the public body providing the records. The public body providing the
records to JLARC shall identify the specific portion of the records to be protected and the applicable
provision of the Freedom of Information Act or other provision of law that excludes the record or
portions thereof from mandatory disclosure.
49
Appendixes
(b) confidential proprietary records provided by private entities pursuant to a promise of confidenti-
ality from JLARC, used by JLARC in connection with its oversight of economic
development initiatives and policies where, if such records are made public, the financial interest of
the private entity would be adversely affected.
6. By August 15 of each year, the Secretary of Commerce and Trade shall provide to JLARC all
information collected pursuant to § 2.2-206.2, Code of Virginia, in a format and manner specified by
JLARC to ensure that the final report to be submitted by the Secretary fulfills the intent of the General
Assembly and provides the data and evaluation in a meaningful manner for decision-makers.
7. JLARC shall assist the agencies submitting information to the Secretary of Commerce and Trade
pursuant to the provisions of § 2.2-206.2, Code of Virginia, to ensure that the agencies work together
to effectively develop standard definitions and measures for the data required to be reported and
facilitate the development of appropriate unique project identifiers to be used by the impacted agen-
cies.
8. The Chairman of JLARC may appoint a permanent subcommittee to provide guidance and direc-
tion for ongoing review and evaluation activities, subject to the full Commission's supervision and
such guidelines as the Commission itself may provide.
9. JLARC may employ on a consulting basis such professional or technical experts as may be reason-
ably necessary for the Commission to fulfill its responsibilities under this authority.
10. All agencies of the Commonwealth shall cooperate as requested by JLARC in the performance of
its duties under this authority.
50
Appendixes
Appendix B: Research methods and activities
JLARC contracted with the University of Virginia’s Weldon Cooper Center for Public Service (Weldon
Cooper Center) for this review. Key research activities performed by Weldon Cooper Center staff for
this study included
• collection and analysis of national- and state-level financial and economic data and state
agency incentive program data;
• program employment performance tracking and employment size assessment;
• estimation of business savings and state tax revenue impacts from incentives;
• quantitative analysis of the economic and fiscal impacts of incentives using a dynamic eco-
nomic model (See Appendix L, available online, for more detail on the analyses);
• interviews with agencies and stakeholders;
• review of other states’ science and technology incentive programs; and
• review of documents and literature.
Collection and analysis of national- and state-level financial and economic data
and state agency incentive program data
This report drew on over a dozen federal, state, and private industry sources of economic data (Table
B-1). Some of this data was used primarily for descriptive purposes, including to highlight trends in
state economic activity such as high technology and space industry employment. Information from
state agencies, including Virginia Tax, Virginia Economic Development Partnership, Center for Inno-
vative Technology/Virginia Innovation Partnership Corporation, Virginia Commercial Space Flight
Authority, and Virginia Employment Commission, was used for both descriptive and analytical pur-
poses.
TABLE B-1
Multiple data sources were collected and used for a variety of analyses
Data source Description of data Analysis
State financial and economic data
Association of University
Statistics Access for Technology Quantify state and national university
Technology Managers
Transfer (STATT) startup rates over time.
(AUTM)
Seed and pre-seed investment and Quantify state and national angel equity
Crunchbase
deals investment levels over time.
51
Appendixes
Data source Description of data Analysis
Compute state and national high tech
employment percentage trends.
EMSI Employment by 6-digit NAICS industry
Determine relative sizes of national and
state space industry.
Quantify state and national fast-growing
Inc Magazine Fast 5000
firms.
Compute state business R&D trends;
National Science
Business R&D and Innovation Survey estimate value of Virginia R&D sales and
Foundation
use tax exemption value.
Quantify state and national venture capital
National Venture Capital Seed and early stage venture capital
investment over time. Identify Virginia-
Association/Pitchbook funds
based venture capital funds.
Compute state and national small
U.S. Census Bureau Business Dynamics Statistics (BDS)
business startup rate trends.
U.S. Patent and
Trademark Office Patent counts by origin and type Compute state patent rates.
(USPTO)
U.S. Small Business SBIR/STTR awards Compute state SBIR/STTR award trends.
Administration
Virginia incentive programs
Center for Innovative
Determine firm location and industry.
Technology/Virginia GAP Funds and CRCF award and
Compute economic impacts.
Innovation Partnership completion information
Corporation
Tax credit utilization; Tax subtraction Computation of tax credit usage and tax
Department of Taxation
fiscal impacts subtraction fiscal impact by fiscal year.
Tabulate tax credit applications and
Department of Taxation Information from tax credit applications
approvals to compute proration factors.
52
Appendixes
Data source Description of data Analysis
Estimate state tax revenue impact of
Virginia Commercial Number of MARS launches, state Spaceport Users Exemption. Ascertain
Space Flight Authority support for operations budget economic contribution of tax incentives
relative to other financial support.
Other
Annual State Tax
State tax revenue by tax category and
Revenue, Census of Tax revenue impact analysis
fiscal year
Government
Determine equity investment leverage for
Equity investment by angel and venture GAP Funds, CRCF, and Qualified Equity
Crunchbase
capital funds and Subordinated Debt Investments Tax
Credit.
Federal Aviation Estimated price per launch by space Estimation of state tax revenue impact of
Administration launch vehicle (Antares and Minotaur) spaceport exemption.
Regional SAM Balances, institution
Estimation of state tax revenue impact of
IMPLAN industry demand, regional employment
spaceport exemption.
multipliers, study area industry data
Demand by industry, GDP, personal
REMI PI+ Tax revenue impact analysis.
income, and transfer receipts by year
Quarterly Census of Employment and Track employment performance and
Virginia Employment
Wages (QCEW) payroll employment determine incentive program average firm
Commission
records size, location, and industry.
SOURCE: Weldon Cooper Center.
Project-level information for each incentive program was aggregated to show characteristics of pro-
gram users and features of the programs, including industry and geographical location. Agency data
was used in combination with other data such as confidential Virginia Employment Commission
(VEC) Quarterly Census of Wages (QCEW) payroll employment records to track employment out-
comes, measure firm employment size, and conduct economic impact analyses.
Program employment performance and employment size assessment
Virginia Employment Commission (VEC) Quarterly Census of Employment and Wages (QCEW)
data was joined with program firm beneficiary data to assess firm employment characteristics. These
characteristics included the employment size distribution and average size of firms benefitting from
incentives. It was also used to assess program participant employment growth over the FY11–FY20
period for the GAP Funds and Commonwealth Research Commercialization Fund (CRCF) programs.
Employment size characteristics are based on the size of the firm when it received an award or when
it used a tax credit. For example, if a company received a GAP Funds investment in FY18, it was
matched with a firm-level 2017 annual employment record. In addition, employment growth for the
GAP Funds and CRCF program companies was computed based on the employment change before
53
Appendixes
and after a program award was received. For example, for a CRCF grant recipient in FY15, employ-
ment change in each of the years 2014–2020 would be compared to base year 2013. This was done
for every firm in the project file by year. The firm employment changes were then aggregated by year.
To conduct these analyses, program project records for FY11–FY20 were matched with 2007–2020
VEC payroll employment data using the Federal Employer Identification Number (FEIN), company
name, company location, and NAICS industry information provided for research and development
(R&D) tax credits, CRCF, and GAP Funds and a list of firm beneficiaries for the Qualified Equity
and Subordinated Debt Investments Tax Credit (angel investment tax credit) provided by Virginia
Tax. The FEIN is a unique nine-digit number that identifies a firm for federal tax purposes.
The total firm match rate was approximately 69 percent, which is lower than other recent studies that
linked establishment employment data with economic incentive project data. For example, earlier re-
ports achieved a 90 percent match rate (Workforce and Small Business Incentives, JLARC, 2018) and an
86.4 percent match rate (Infrastructure and Regional Incentives, JLARC, 2020). The lowest match rates were
obtained for business startups (CRCF, GAP Funds, and the angel investment tax credit), with match
rates between 53 percent and 64 percent. These rates are similar to other small business incentive
programs examined in a previous report; the Small Business Investment Grant Fund obtained a 68.4
percent match rate and the SWaM Loan Fund had a 63.7 percent match rate. Some business startups
that received awards late in the study period (e.g., FY20) might not yet be reflected in 2007–2020
payroll reporting data. Moreover, some small firms will not report payroll data to VEC if they have
no employees.
TABLE B-2
Project-establishment employment record matching success rate by program
Employment
Project record
Program records matches Success rate
CRCF 145 228 63.6%
GAP Funds 162 304 53.3
R&D expenses tax credit 730 966 75.6
Major R&D tax credit 73 90 81.1
Angel investment tax credit 126 211 59.7
Total 1,236 1,799 68.7%
SOURCE: Weldon Cooper Center analysis.
NOTE: TY2017-2020 firm beneficiaries only.
Estimation of business savings and state tax revenue impacts from tax incentives
Business savings and spending and/or tax revenue impact estimates for individual incentive programs
came from several sources, including agency records, Virginia Tax data and reports, and imputation
using secondary source information. Information on amounts awarded and disbursed to GAP Funds
and CRCF award recipients was obtained from Virginia Innovation Partnership Corporation project
54
Appendixes
records. Firm tax credit utilization data for each of the tax credits examined (i.e., R&D expenses tax
credit, major R&D tax credit, angel investment tax credit) were obtained from Virginia Tax credit
utilization files. One limitation of the two R&D related tax credit tax revenue impact estimates is that
they do not take into consideration that, in the absence of the credits, some users could instead utilize
the state’s research and development tax subtraction. Thus, the actual revenue impact of these pro-
grams may be less than credit utilization by some unknown factor. Data for the Qualified Business
Long-term Capital Gains Subtraction (capital gains subtraction) was obtained from Virginia Tax,
using information that is reported annually to the General Assembly (Report on Long-Term Tax
Subtraction). It should be noted that the revenue impact figures are estimates. Because of a high
rate of individual income reporting errors by taxpayers, compliance audit data on a rolling basis is
used to adjust downward the initial tax revenue impacts.
Information on business savings and associated state revenue impacts for the spaceport users exemp-
tion, Zero G resupply subtraction, and R&D sales tax exemption were estimated using both primary
and secondary data as explained below.
Virginia Spaceport Users Exemption
Virginia Tax has issued two estimates of the spaceport users exemption tax expenditures since the
exemption was established by the General Assembly in 1997. The first estimate was produced for the
Fiscal Impact Statement that accompanied the legislation creating the exemption. The estimate was
based on tax audit information and estimated the value of the exemption to users at $248,000 in FY98.
The second estimate was produced in 2004 for a Fiscal Impact Statement for legislation that advocated
repeal of several commercial and industrial exemptions and was based on information obtained from
the Virginia Commercial Space Flight Authority, including launch activity from FY97 to FY04. Total
eligible sales were determined from this information. A state tax revenue impact estimate of $70,000
was computed for FY10 based on this information.
A different methodology was used to estimate the spaceport exemption state revenue impact for this
report, since MARS space launch activity did not begin in earnest until 2013. Estimates are based on
IMPLAN data for the state of Virginia and estimates of space launch service costs for various types
of space launch vehicles. IMPLAN is an industry-standard, commercial economic impact model and
regional economic database. It is based on input-output analysis, which requires estimates of the value
of intermediate input purchases for each industry. The relevant purchasing industry in the case of
space launches is NAICS sector 481212 (Nonscheduled Chartered Freight Air Transportation), which
includes businesses that provide space freight transportation. Using the 2018–2020 sector scheme
(which differs from the 2014–2017 sector scheme and the 2009–2013 sector scheme), the correspond-
ing IMPLAN sector is sector 414 (Air Transportation).
The estimate relies on information on launch service cost information from the Federal Aviation Ad-
ministration (FAA), which reports that the launch costs of the two space launch vehicles used at
MARS are $80 million for the Antares launch expenses and $40 million for the Minotaur launch ex-
pense in 2018 dollars (FAA 2018). These costs (i.e., space launch company revenues or sales) were
multiplied by the number of launches each fiscal year for each particular type of space launch vehicle
and summed for the fiscal year. Next, exemption eligible input purchases were obtained by identifying
the intermediate input purchases that were eligible for the exemption. This consisted of spending on
55
Appendixes
inputs that fall within manufactured commodity sectors 3109-3395 and leased goods commodity sec-
tors 3450-3454. The taxable purchase amount is estimated by multiplying fiscal year launch sales by
gross absorption coefficients for IMPLAN for these input sectors. These coefficients represent the
input purchases for various inputs per dollar of output. For example, the air transportation industry
spent $0.0011283 per dollar of output on commodity 3278 (Machine shops). This absorption coeffi-
cient was multiplied by the cost of two Antares space vehicle flights in FY18 ($160 million) to obtain
the estimated expenditure on this input of $180,521 for the fiscal year. Estimates for Virginia then
formed the basis of the relevant sales tax base for sales and use tax revenue impact calculations.
The estimates for the space exemption are significantly higher than previous Virginia Tax estimates.
The actual figure varies with the ebb and flow of launch activity, with an average annual revenue
impact for the FY11–FY20 period of approximately $618,000. This is higher than the $70,000 Virginia
Tax estimate for FY10 and $248,000 estimate for FY98 produced for legislative fiscal impact state-
ments. These differences likely stem from differences in imputation methodology, increased launch
activity at MARS, and inflation escalation factors.
Zero G resupply subtraction
Estimates of the tax revenue impact of the Zero G resupply subtraction relied on information on
state fiscal year firm launch revenue estimates described for the spaceport users exemption. This figure
was multiplied by a gross profit margin average estimate of 22% for Northrop Grumman for 2010–
2021 (obtained from the Macrotrends financial research metric website for Northrop Grumman) to
obtain corporate profit for the space launch activities. Since this income is reported as enterprise-wide
income, it is subject to apportionment. Information on launch company apportionment was obtained
from Virginia Tax electronic records for 2013–2016 from Form 500A (Corporation Allocation and
Apportionment of Income). This apportionment factor was multiplied by profit estimates for each
year and the corporate tax rate of 6%.
Research and Development Exemption
The estimate for this exemption relied on the methodology used by Virginia Tax to generate a FY15
projection for use in a report on the exemption by the Joint Subcommittee to Evaluate Tax Preferences
(2015). The previous estimates were also based on a baseline estimate for FY11 using the Virginia Tax
methodology. However, values after FY11 were escalated by a CPI inflation factor, whereas each fiscal
year (except for FY19 and FY20, which were escalated) produced are based on annual estimates ob-
tained from annual National Science Foundation (NSF) reports. The estimates for this report are
slightly lower than those reported previously for FY11–FY20 in an annual JLARC incentives report,
coming in at $39.0 million versus $43.3 million.
The methodology utilized national and Virginia R&D data from the annual NSF Business R&D and
Innovation Survey (data published for 2011–2019). Four tables are used:
• costs for industrial R&D performed in the United States, by industry and company size last
published in 2007 that shows expenditures on wages of personnel, materials and supplies, and
other costs;
56
Appendixes
• domestic R&D paid for by the company and others and performed by the company, by source
of funds and state for 2011–2019 that shows R&D paid for by the company and the federal
government in Virginia;
• domestic R&D paid for and performed by the company, by character of work, industry, and
company size for 2011–2019 that shows the portion of R&D accounted for by basic and ap-
plied research that are eligible for the exemption nationwide; and
• domestic R&D paid for by the U.S. federal government and performed by the company, by
character of work, industry, and company size for 2011–2019 that shows, which is used to es-
timate federally funded R&D as a service.
Since the exemption includes federal contractors that perform R&D as a service as well as private
business R&D, private business R&D is estimated by determining the portion of federally funded
R&D that is performed by the service sector (i.e., non-manufacturing sector). This represents approx-
imately 19–23 percent of that activity for 2011–2018. This proportion is then applied to federally
funded R&D in Virginia for each year to estimate R&D as a service. This total is then added to private
business R&D to obtain total covered R&D for the state. Next, the proportion of these expenditures
for basic and applied research was calculated using a three-year rolling average. Virginia Tax compared
NSF’s definition of basic and applied research with Virginia’s exemption criteria and estimated that
90 percent of applied research would be covered under the exemption and 100 percent of basic re-
search. These were used to determine the relative weighted average of total basic and applied research
based on national data that eligible expenses fell between approximately 92–93 percent (W1). Lastly,
expenditures on materials and supplies are assumed to be eligible for the exemption and represent
11.7 percent (W2) of all R&D costs. Finally, based on Virginia Tax audit data, just 25 percent (W3)
qualify for the exemption under the “exclusive and direct use” criteria. Thus, the following calculation
was performed to estimate the sales tax base.
Sales Tax Base=W1*W2*W3*(Virginia private business R&D+Estimated Virginia R&D as a service)
The sales tax base was then multiplied by the effective state sales and use tax rate for the corresponding
fiscal year (3.98 percent in 2011–2012 and 4.28 percent in 2013–2018). Estimates for FY19 and FY20
were obtained by escalating the estimated tax revenue in FY18 by the Consumer Price Index.
Interviews with agencies and stakeholders
Interviews were held with agency staff to discuss programs on the evaluation list, including staff from
Virginia Tax, Virginia Economic Development Partnership, Virginia Innovation Partnership Corpo-
ration, and Virginia Commercial Space Flight Authority (Virginia Space). Industry stakeholders were
also interviewed, including representative of
• Virginia technology councils: Northern Virginia Technology Council (NVTC), VERGE (an
alliance that includes the Roanoke-Blacksburg Technology Council and Valleys Innovation
Council), and Hampton Roads Innovation Collaborative, and
• two private companies representing industries that also benefit from incentives in this evalua-
tion.
57
Appendixes
Review of other states’ science and technology incentives
Weldon Cooper Center staff reviewed several sources of information to obtain information on com-
parable science and technology incentives offered by other states. Sources often varied by the type of
incentive since there is no authoritative, comprehensive source on all state incentives. They include
the following:
• Space launch incentives. Information from the Federal Aviation Administration (2009); Coun-
cil for Community and Economic Research (C2ER) incentives database; Florida Office of
Economic and Demographic Research (2018); and PFM Group Consulting LLC (2019) sup-
plemented by a review of spaceport and state departments of taxation and revenue websites.
• R&D sales and use exemptions. Review of Wolters Kluwer VitalLaw; Healy Schadewald, and
Nelson (2021); Joint Subcommittee to Evaluate Tax Preferences (2015); and state departments
of taxation and revenue websites.
• R&D tax credits. Information from Wolters Kluwer VitalLaw; Healy Schadewald, and Nelson
(2021); Commonwealth of Pennsylvania Independent Fiscal Office (2020); and Schmidt
(2021).
• Angel investment tax credits. Review of Denes et al. (2020); Howell and Mezzanotti (2019);
the C2ER incentives database; and state departments of taxation and revenue websites.
• Venture capital fund tax incentives. Information from Wolters Kluwer VitalLaw and the
C2ER Incentives Database.
• Long-term capital gains incentives. Information from Wolters Kluwer VitalLaw, McNichol
(2021), and Guzman (2020).
• Direct investment funds. Programs comparable to GAP Funds were identified using infor-
mation from the C2ER Incentives Database; Center for Regional Economic Competitiveness
and Cromwell Schmisseur (2016); PFM Group Consulting LLC (2019b); and Google keyword
searches.
• Commercialization grants. Information on state SBIR/STTR matching programs was ob-
tained from the U.S. Small Business Administration (2021), while information on the univer-
sity commercialization component was obtained from the C2ER incentives database and key-
word searches using the Google search engine.
Review of documents and literature
During this study, several sources of information, including documents, reports, and published or
unpublished research were examined. The purpose of this literature review was to understand the
purpose and goals of Virginia incentive programs, industry locational factors, the role and importance
of economic incentives, market imperfection rationales for programs, empirical research on the eco-
nomic effects of various science and technology incentive programs at the national and state level,
and methodological approaches for quantifying the economic and tax revenue impacts of economic
incentives. Sources consulted included:
• program materials describing the programs, Virginia agency reports describing program usage,
and legislative statutes authorizing the programs;
• program evaluations and economic impact studies published by state agencies or their consult-
ants in other states; and
58
Appendixes
• scholarly books and articles that examine the economic effects of economic incentives for
spaceports, research and development, and equity investment.
59
Appendixes
Appendix C: Economic benefits and return in revenue for all
Virginia incentives reviewed to date
Economic development incentives vary in their economic benefit and return in revenue to the state.
To provide context to the economic benefits and return in revenue generated by each incentive, in-
centives have been categorized as having a negligible, low, moderate, or high economic benefit and
return in revenue. To determine the category, each incentive is scored from 0 to three on four
measures: the amount of jobs, Virginia GDP, and personal income generated per $1 million spent on
the incentive and the return in revenue generated per $1 spent on the incentive. The scoring is based
on the distribution of all 52 incentives reviewed to date for each of the four measures, with a score
of ‘0’ meaning the incentive fell below the 25th percentile (or first quartile) of the distribution for the
measure and a score of ‘three’ meaning the incentive was in the highest quartile (above the 75th per-
centile) for the measure.
The scores for the three measures of economic benefits (jobs, Virginia GDP, and personal income)
were averaged to arrive at an overall average score for economic benefits for each incentive. Incentives
with average scores for the three measures near ‘0’ were categorized as having negligible economic
benefits relative to other incentives. Incentives with average scores near ‘1’, ‘2’, or ‘3’ were categorized
as having low, moderate, or high economic benefits, respectively, relative to other incentives. For return
in revenue, an incentive with a ‘0’ score on that measure was categorized as having a negligible return
in revenue relative to other incentives. An incentive with a score of ‘1’, ‘2’, or ‘3’ was categorized as
having a low, moderate, or high return in revenue, respectively, relative to other incentives.
An incentive’s category may change over time. Only 52 of more than 70 Virginia economic develop-
ment incentives have been evaluated so far, and because incentives are categorized relative to other
incentives evaluated, incentives may change categories as additional incentives are evaluated each year.
Once all incentives are evaluated, re-evaluation of incentives will begin. The category may change for
re-evaluated incentives because of new or improved outcomes data, program changes, and changes to
the state economy and industry mix.
Of the incentives evaluated through June 2022, grants tend to generate moderate or relatively high
economic benefits and returns in revenue. Tax incentives tend to generate low or negligible economic
benefits and returns in revenue (Table C-1). Grant programs have higher economic benefits than other
types of incentives because a higher percentage of grant funding is directed to businesses in manu-
facturing industries, which generally have high economic multipliers and pay higher wages. In addition,
businesses that receive grants must agree to create jobs and make capital investments, and usually
make above minimum job creation and capital investment levels, but other incentives may not have
similar requirements for businesses to receive an award.
60
Appendixes
TABLE C-1
Grants tend to generate higher economic benefits and returns in revenue than tax incentives
Incentive Economic Return in state
Incentive type benefits revenue
Aircraft parts, engines, and supplies exemption Exemption
Airline common carrier exemption Exemption
Biodiesel and Green Diesel Tax Credit Tax credit
Coal Employment and Production Incentive Tax Credit Tax credit
Coalfield Employment Enhancement Tax Credit Tax credit
Film exemption Exemption
Green Job Tax Credit Tax credit
Major Research and Development Tax Credit Tax Credit
Railroad rolling stock exemption Exemption
Recyclable Materials Tax Credit Tax credit
R&D exemption Exemption
R&D expenses tax credit Tax Credit
Ships and vessels exemption Exemption
Spaceport users exemption Exemption
Telework Tax Credit Tax credit
Transportation Partnership Opportunity Fund Grant
Qualified Business Long-Term Capital Gains
Subtraction
Subtraction
Qualified Equity and Subordinated Debt Investment
Tax credit
Tax Credit (angel investment tax credit)
Zero G Zero Tax resupply subtraction Subtraction
Barge and Rail Usage Tax Credit Tax credit
Commonwealth Research Commercialization Program Grant
Economic Development Access Program Grant
International Trade Facility Tax Credit Tax credit
Motion Picture Production Tax Credit Tax credit
Pollution control equipment exemption Exemption
Railroad common carrier exemption Exemption
Real Property Investment Grant Grant
Semiconductor manufacturing exemption Exemption
Semiconductor wafer exemption Exemption
61
Appendixes
Incentive Economic Return in state
Incentive type benefits revenue
Tobacco Commission Megasite Grant Grant
Virginia Business Ready Sites Program Grant n.a. n.a.
Worker Retraining Tax Credit Tax credit
Governor’s Motion Picture Opportunity Fund Grant
Job Creation Grant Grant
Manufacturers SSF apportionment Other
Port of Virginia Economic and Infrastructure Grant Grant
Port Volume Increase Tax Credit Tax credit
Qimonda (semiconductor) grant Grant
Rail Industrial Access Program Grant
Tobacco Region Opportunity Fund Grant
Cash Collateral Program Loan
Data center exemption Exemption
Economic Development Loan Fund Loan
GAP Funds Program Other
Loan Guaranty Program Loan
Micron (semiconductor) grant Grant
Small Business Investment Grant Grant
Small Business Jobs Grant Grant
SWaM Loan Fund Loan
Trade Show Assistance Program Grant a
Virginia Jobs Investment Program Grant
Virginia Leaders in Export Trade (VALET) Grant a
Negligible Low Moderate High
SOURCE: JLARC staff analysis of economic impact and return in revenue estimates generated by the Weldon Cooper Center.
NOTE: Includes incentives evaluated as of June 2022. Time period for which incentives are evaluated varies. Estimates are sensitive to the
assumptions used to determine the percentage of economic activity that can be attributed to the incentive.
a
Not technically grants but provide financial assistance similar to grants.
62
Appendixes
Appendix D: Agency responses
As part of an extensive validation process, the state agencies and other entities that are subject to a
JLARC assessment are given the opportunity to comment on an exposure draft of the report. JLARC
staff sent an exposure draft of this report to the Virginia Commercial Space Flight Authority (Virginia
Space), Virginia Department of Taxation, Virginia Innovation Partnership Corporation, secretary of
finance, secretary of commerce and trade, and secretary of transportation.
Appropriate corrections resulting from technical and substantive comments are incorporated in this
version of the report. This appendix includes response letters from the
• Virginia Commercial Space Flight Authority and the
• Department of Taxation.
63
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