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Non-Profits, Investors Worry About Proposed Washington State Tax Surcharge Increase

By Alex Philippidis

NEW YORK (GenomeWeb News) – Washington state lawmakers are considering more-than-doubling the business and occupation tax surcharge imposed on non-profit research institutes engaged in R&D, as well as their startup spinouts and other biotech businesses — part of an $800 million package of taxes intended to balance a $2.8 billion budget shortfall.

The current B&O tax surcharge on qualified research and development expenditures, other than for capital improvement purposes, is the gross income derived from R&D, multiplied by 0.484 percent. That tax would rise by half a percentage point, to 0.974 under the measure, which passed the state House of Representatives earlier this month by a 52-45 vote, with one representative excused.

ESSB 6143, a bill to modify the state excise tax law, is pending in the state Senate's Rules Committee, which on Thursday placed the bill on a third reading. State lawmakers have extended their 60-day regular session with a special session that began Monday.

"All the R&D community is up in arms about this — as well as the investment community," Robert Nelsen, a co-founder and a managing director of Arch Venture Partners, told GenomeWeb Daily News. "It seems like innovation is under fire at the federal and state level. There is a whole lot of talk from all levels of government about how great innovation is, and the response is to tax it. It is absolutely insane."

Nelsen has joined the state's life sciences trade group, the Washington Biotechnology and Biomedical Association, and the Washington Global Health Alliance, which promotes collaborations in global health research and programs across the state, in fighting the proposed B&O tax hike.

Leroy Hood, president of the Institute for Systems Biology, told GWDN a review of the bill by ISB's senior vice president for finance and operations, James Ladd, found the bill is not likely to hurt the institute in the short term because it can more than make up the tax through several tax credits.

"The longer term is very unclear. I think the biggest impact that it will have is that it will reduce the attractiveness of startup companies in Seattle," said Hood.

Hood has co-founded more than a dozen companies, including five spun out of ISB that are based on its technologies. He recalled having "a long and difficult fight" with the funding venture capitalists and CEO candidates to locate one of the ISB spinouts — Integrated Diagnostics — in Seattle. That firm, which raised $30 million in Series A venture capital financing last fall, aims to develop tests for monitoring organ-specific proteins that appear in the earliest stages of diseases, using genomic and proteomic technologies and discovery data licensed from ISB.

"I won — just barely," said Hood. "This probably won't happen in the future."

He added, "I think the bill is unbelievably short sighted — just what I have come to expect from a state government that does not seem to understand that the future for Washington will be embedded in information-based jobs. This is exactly the wrong approach to facilitating the information—based economy.

"I must say it was one of the big debates I had with myself when contemplating moving to Seattle — namely is the state populist and not forward looking? It looks like my skeptical self was correct," said Hood.

Also joining in the effort is the Seattle Biomedical Research Institute, which has recently re-branded itself as Seattle BioMed. Lynn Zimmerman, Seattle BioMed's director of finance, told GWDN the institute now more than recoups what it pays in B&O taxes by participating in an employee commuter trip reduction program.

"The increase will probably put us over the commuter trip reduction credit amount, and as a result, we are planning to apply for the High Technology Business and Occupation Tax Credit enacted in 2004, of which we currently do not take advantage," Zimmerman said.

Zimmerman noted that most of Seattle BioMed's revenues came from two sources not subject to the B&O tax: contributions from donors and grants.

According to Seattle BioMed's annual report for the fiscal year that ended June 30, 2009, the institute derives 49.5 percent of its revenues from private grants and contracts, another 35 percent from government grants, and 9 percent from contributions.

Private grant revenue grew 20 percent year-over-year, to almost $22.9 million in FY 2009; while government grants rose about 22 percent, to $16.2 million; and contributions slid 16 percent, to $4.2 million.