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Maryland Lawmakers to Decide Final Figures for State's Contribution to Biotech Tax Credit

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A conference committee of Maryland lawmakers will begin working this week to resolve how much money the state should set aside for its Biotechnology Investment Incentive Tax Credit as it crafts the state's budget for fiscal 2010, which starts July 1.

The program, launched in 2005, provides tax credits equal to 50 percent of an eligible investment, and requires investors make an equal match. Lawmakers have until April 6 to pass a budget and until April 13 before the legislative session is set to end, though that date can be pushed back if both houses of the legislature fail to agree on a budget by then.

The state Senate this week is expected to vote in favor of continuing funding the credits at the $6 million level set aside in fiscal 2009, which is the level Gov. Martin O'Malley proposed in January as part of his $31.6 billion fiscal 2010 budget.

In its own version of the proposed budget, approved on March 26, the state's House of Delegates voted to cut the credits by one-third, or to $4 million. The House went along with a recommendation from its Appropriations Committee and that panel’s education and economic development subcommittee, which initially considered eliminating the tax credit program altogether.

The delegates’ Democratic majority beat back by 16 votes a bill introduced by one of their own members, Brian Feldman (D-Montgomery County), that would have maintained the tax credit at this year’s level by shifting $2 million from the state's $18.4 million stem-cell fund.

"Obviously, we are hopeful that the $6 million that Governor O’Malley put into his budget will remain, but we have to wait until sometime late [this] week before a decision is made," Karen Glenn Hood, a spokeswoman for Maryland's Department of Business and Economic Development, told BioRegion News last week.

The House of Delegates' fiscal 2010 budget is about $850 million smaller than O’Malley's. Since O'Malley proposed his budget, the state Board of Revenue Estimates, chaired by State Comptroller Peter Franchot, has lowered its forecasts to reflect recent declines in tax revenues.

The most recent forecast, delivered to state lawmakers on March 11, said the state will fall $445.5 million below its revenue projection in fiscal 2009, and $716.5 million below its projection for fiscal 2010.

O'Malley and legislative leaders have responded to these shortfalls by scrambling to make $550 million in further budget cuts, and have warned life-sciences advocates that programs benefiting their industry will not be spared.

Richard Zakour, executive director of MdBio, a division of the Tech Council of Maryland, told BRN last week that his group had asked members to lobby state Senators and the chamber's Budget and Taxation Committee to keep funding for the tax credit at $6 million.

"We tried to stress the importance of having the full funding that the governor originally proposed. A cut of a dollar from state funding is a cut of a dollar from independent investors, too. So it really is a double whammy," Zakour told BRN. "If you can have investors bringing in equal shares into the state, and spending money to create jobs and buy services, it will really stimulate the [state] economy."

MdBio originally called for Maryland to double its funding for the tax credit. The request appears in a six-page 2009 Policy Platform that serves as the industry’s wish list of legislation it is pursuing in Annapolis.

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"This program is a critical component for seeding early-stage biotech companies to develop and thrive in Maryland instead of elsewhere," the policy platform stated. "This program is a nationwide model and is featured in the Biotechnology Industry Organization’s state best-practices report for venture-capital and discovery funds."

MdBio’s argument has found support from at least one life-sci ally in the state legislature: Del. Dan Morhaim (D-Baltimore County) told BRN he had introduced legislation to prevent cuts to either the tax credit program or the state’s stem-cell research funding program, which has shrunk twice in the last year, and which Republican lawmakers are seeking to lower again.

“The biotech tax credit helps businesses and jobs and the economy. [With] the stem-cell funding, while certainly important, it's clear that with the change in the federal level with the Obama administration [lifting restrictions on federal spending on stem-cell research], it may be a more prudent use of state money to reverse that," Morhaim said.

However, he conceded that "changing a funding decision of the [Delegates'] committee is a challenging thing to do."

Under the tax credit program, the value of the tax credits is equal to half of an eligible investment made in a qualified Maryland biotechnology company during the taxable year, up to a maximum $250,000.

To qualify for the credit, companies must be less than 12 years old; be headquartered in Maryland; employ fewer than 50 people; and have a valid certification from DBED. Investors are required to submit applications for the credits to DBED, which is supposed to review the applications and issue initial credit certifications within 30 calendar days.

However much the state sets aside for the tax credit, the program would see some revisions under a bill that passed the House of Delegates unanimously on March 19. House Bill 493, introduced by Del. Ann Marie Doory (D-Baltimore) would change:

• The state's recapture timeframe: Current law allows the state to "recapture" unused tax credits within two years from the close of the tax year in which the credit was approved. The bill changes that time period to two years from the close of the tax year for which the credit is claimed.

• The definition of a "qualified" investor: The bill explicitly includes individuals as "qualified" investors, unlike the current law, which defines such investors as any entity that invests at least $25,000 in a qualified company.

• The benefit year: The bill clarifies that the credit can be claimed in the tax year in which a qualifying investment is made. For instance, under current law eligible taxpayers could not claim until 2009 those credits earned for investments made in 2008 due to changes in the tax credit law enacted last year. Those changes altered the definition of qualified investor to mean any entity that invests at least $25,000 in a qualified company, and defined investments as cash or cash equivalents paid in exchange for an ownership stake in the biotechnology company.

'Unsurpassed Interest'

According to the Fiscal and Policy Note for HB 493, DBED in calendar year 2008 issued $6.3 million in initial credit certificates to 18 companies located in the city of Baltimore and the counties of Baltimore, Frederick, Howard, Montgomery, and Prince George’s. The program saw 170 tax credit applications, of which 70 were filed by Maryland residents and 100 by nonresidents.

During the current fiscal year, the state awarded its entire $6 million to 16 qualified Maryland biotechnology companies selected from 157 applications, according to DBED. The 16 attracted $12.5 million of private investment.

Since the program was launched in 2005, DBED has received 618 applications, which have resulted in over $36 million to 39 different companies, some of which benefited in multiple years, according to Glenn Hood. The companies are located in the city of Baltimore and the counties of Frederick, Montgomery, Prince George’s, Howard, and Baltimore.

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The biotech tax credit program is popular enough to have run out of funding on the first day of the current fiscal year last July 1, during which Maryland news outlets carried reports of entrepreneurs waiting in line for hours and camping out outside DBED's offices waiting to apply for the credits during the first day of availability.

The agency trumpeted the brisk demand for the tax credits in a press release that included a comment from O'Malley: "This unsurpassed level of interest in Maryland’s existing biotech tax credits further supports the need for increased investment in our growing bioscience industry."

O'Malley had promised to double funding for the credit to $12 million as part of a longer-range plan to quadruple state spending on the program to $24 million by fiscal 2013. And that plan was part of his plan to spend $222 million for the credit through 2020 under his 10-year, $1.3 billion BIO 2020 life-sciences initiative, which he announced last summer [BRN, June 27, 2008].

But the governor, a Democrat who took office in part by promising higher biotech spending than the incumbent Republican he unseated, retreated from increasing the credit soon after the economy began spinning out of control.

"The governor's initiative is a long-term initiative. This is a marathon, not a sprint," Zakour said. "We're all feeling the pinch of the economy this year, and this year may be a minor setback. But I think that we'll be back on track. We have strong support within the state. I don’t think it's anything that's going to bring us to our knees. We're suffering from the same thing everybody else is suffering from, trying to look at what can we do with today's dollars to get through the crisis?"

This is the second straight year O'Malley has backed away from doubling the credit. In 2008 he cited fiscal concerns for his desire to fund the program at the previous year's level [BRN, Jan. 28. 2008].

That year, DBED surveyed businesses that received biotech tax credits in FY 2007 and the first half of FY 2008. Twenty-six of the 30 companies that received the tax credits up to then responded to the survey. Among findings:

• Employment: The companies reported a total of 180 employees, of which 170.5 were working in the state.
• Average annual salary: $75,166.
• 15 of the companies said they used their tax credit to hire a total 46 new employees.

Describing what they used the credit to pay for, 22 companies cited research and development, 17 cited the protection of intellectual property, 12 funded marketing activities that included website development and trade show attendance, 12 purchased equipment totaling $1.1 million, 12 funded operating expenses, six conducted clinical trials, six made capital expenditures, and five conducted executive searches or filled executive positions.

Also according to the survey, 16 tax credit recipients said it enabled them to leverage unspecified additional capital, while seven said it allowed them to raise other investments, including a $6.3 million private investment; six said it enabled them to raise a combined $5.5 million in non-venture private equity; six said it allowed them to secure a combined $792,000 in loans; and two reported it enabled them to raise $250,000 in private venture capital

The tax credit program is not the only life-sciences program facing the possibility of a budget cut. The state Senate this week is set to cut funds for Maryland's stem-cell program from the current $18.4 million to $5 million as recommended by its budget committee — and as voted last year by the full state Senate.

The Delegates' education and economic-development subcommittee froze spending for the state's stem-cell research fund at $18.4 million — the same as this fiscal year, and the sum proposed by O'Malley in his FY 2010 spending plan.

The stem-cell program shrunk a year ago from the $24 million it enjoyed in FY 2008 to $19 million under the $31 billion budget O'Malley and state lawmakers approved for this fiscal year. That figure marked a triumph for the stem-cell program, which had faced proposed cuts that would have left it with between $5 million and $15 million [BRN, March 31, 2008].

But with revenues starting to slide last fall, the governor and legislature sliced $1 million from the program as part of a $300 million package of spending cuts, bringing state stem-cell funding down to $18 million [BRN, Oct. 20, 2008].

MdBio's policy platform called for Maryland to maintain state stem cell funding "at or near current levels," but only until the Obama administration's lifting of restrictions on federal stem cell funding, which occurred March 9.

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