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Md.’s Cash Crunch Could Quash Gov’s FY’09 Plan to Double R&D Credits, Other Programs

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Maryland’s ”fiscal concerns” have driven Gov. Martin O’Malley into a financial corner, and the life-sciences industry will likely bear the brunt of recent changes proposed to the state’s fiscal 2009 budget.
 
Faced with a widening budget gap, O’Malley has proposed a $15.2 billion spending plan for the coming fiscal year that would reverse an earlier commitment to double future R&D tax credits. By comparison, the fiscal 2008 budget was $14.6 billion.
 
The O’Malley’s proposed budget for fiscal 2009, which begins July 1, would also freeze government spending for several other programs intended to expand the state’s life-sciences industry, including the state’s stem cell-research fund.
 
The spending plan does not include a proposal O’Malley made last year to double the Maryland Research and Development Tax Credit. That measure, which the General Assembly did not approve, sought to raise the credit from $6 million to $12 million by increasing the cap for the basic tax credit from $3 million to $5 million, and the cap for the growth credit from $3 million to $7 million.
 
At the time, politics played a role in quashing the credits after lawmakers said they preferred to see results from at least a full year of operation before considering any changes [BioRegion News, June 18, 2007].
 
This year, the state economy stands ready to cripple the measure, Lawrence Mahan, director of the biosciences group of the Maryland Department of Business and Economic Development, told BRN last week.
 
“Because of all the fiscal concerns that are going on in the state right now, the idea of increasing it was just not feasible,” Mahan said.
 
According to the state Board of Revenue Estimates, chaired by State Comptroller Peter Franchot, the state expects revenue growth to slow to around 2.2 percent in fiscal 2008 but rebound to 5.2 percent in FY 2009. But real-estate transfer taxes are expected to slip 11 percent, to $188.6 million this fiscal year, before rising to $199.3 million for fiscal 2009.
 
Mahan said O’Malley and DCED remain committed to expanding the life sciences industry in Maryland. To that end, Mahan said, O’Malley and DBED will work this year to make permanent the state’s Biotech Investment Tax Credit, now set to sunset on Jan. 1, 2011.
 
“The general feeling is, we’re such an R&D dependent state that the R&D tax credit should remain in effect and not have to be subject to a sunset provision,” which was carried out a few years back, Mahan said.
 
O’Malley, a Democrat in his second year in office, signed into law one measure that qualified publicly funded incubators for local property tax credits (Senate Bill 705 / House Bill 327), and another measure committed the state to continue the Maryland research and development tax credit research if a similar federal credit ends or is repealed (HB 1197). 
 
‘On the Table’
 
Mahan cited another O’Malley accomplishment — creating a 15-member life science advisory panel to study seven sub-topics, for which six “working” groups have been created: Capital formation, business environment, workforce development and education, future-ready pipeline programs, academic institutions and translational research, global marketing and outreach, leadership and capitalizing on the presence of the Food and Drug Administration and other federal research institutions in Maryland.
 
“Every idea is on the table right now,” Mahan said, adding that reference materials being studied by the commission will soon be posted on a website it plans to launch in the next week or two; the website would be linked to DBED’s website, ChooseMaryland.org.
 
The Life Sciences Advisory Board has until Dec. 15, 2008, to submit its report to O’Malley. “They’re working hard to get the guts of the strategic plan done by the summer, because if it has recommendations that involve fiscal impact, or programs, those things need to all get lined up in the fall, so most of that work can be prepared prior to the next session in January,” Mahan said.
 
That includes, he said, one of the purposes stated for the commission when it was formed last year — to create a one-stop agency for companies seeking to relocate to the state or expand existing businesses there.
 
In its annual report filed last month, posted on DBED’s website and available here, the advisory board offered a summary of its largely organizational activity during its first two meetings, held Oct. 17 and Dec. 11, 2007.
 
Pending the findings of his advisory panel, O’Malley has held off calling for the multi-million-dollar package of incentives advocated by another elected state official.
 
Comptroller Peter Franchot told BRN last month he would pursue a measure comparable to the $1 billion, 10-year incentive package under review in Massachusetts, with the goal of attracting and retaining in Maryland as many life sciences businesses and their jobs as possible.
 
Franchot spoke days after issuing a 28-page economic impact study, available here, crediting the state’s life-sciences sector with sustaining 120,000 total jobs, generating $29 billion in total economic activity, $11 billion in revenues, and nearly $600 million in tax receipts annually.
 
Franchot’s proposal, first reported by BRN [BioRegion News, Dec. 31. 2007], followed a Dec. 13 daylong “Life Sciences Summit” organized by his office as an attempt to unite industry, academic, and government leaders around a common agenda of increasing state subsidies for life-sciences programs.
 
The proposal was reported on the website Frederick County Biotech Community, and raised eyebrows from the editor of another blog, who complained that Franchot should pay more attention to improving the state’s finances than seeking a share of it for a favorite purpose: “Maryland still has a fiscal constraint over its head, and if Franchot was doing his job, he would notice such a constraint over the books,” commented Maryland Politics Today, a website by P. Kenneth Burns focusing on the state’s political scene. 

 

“It’s unclear how that would fit into the budget process at this point,” MDBED’s Mahan said.
 
Earlier this month Franchot made another proposal with biotech in mind, calling on the state to repeal a planned increase in the sales and use tax on computer services. The tax — enacted by O’Malley with legislative support gained during last year’s special session — would rise July 1 to 6 percent from 5 percent, and has angered leaders and advocates for the life sciences and other tech-based industries.
 
Computer services covered by the tax hike include computer facilities management and operation; custom computer programming; computer system planning and design that integrate computer hardware, software, and communication technologies; computer disaster recovery; and data processing, storage, and recovery as well as hardware or software installation or maintenance and repair. The tax is supposed to expire on June 30, 2013.
 

“Because of all the fiscal concerns that are going on in the state right now, the idea of increasing [the R&D tax credit] was just not feasible.”

“This technology tax, if allowed to stand, will erode Maryland’s competitive advantage in the knowledge-based economy,” Franchot said Jan. 18 during his State of the Treasury address.
 
A Franchot spokesman was unavailable last week to discuss the tax rollback effort or the proposed budget.
 
Officials agreed to raise the computer-services tax at a special legislative session late last year. The hike was part of a $1.3 billion package of business tax hikes approved at the session, where lawmakers also approved $400 million in potential budget cuts. O’Malley has defended the tax hikes as necessary to plug a $1.7 billion revenue shortfall in the state’s $14.6 billion budget for the current fiscal year, which ends June 30.
 
Franchot has clashed publicly with O’Malley over the need for the tax hikes — a reflection of the often contentious relationship between two of Maryland’s top elected officials.
 
Siding with Franchot is the Tech Council of Maryland, a Rockville, Md.-based umbrella group for the life science industry and other technology sectors. The tech council has made repealing the computer sales-tax hike its top legislative lobbying priority among six that it will pursue this year [BioRegion News, Jan. 21].
 
Like Franchot, the council has argued the tax will hurt the state’s tech industries, while compelling a broad range of Maryland companies to seek IT services from outside the state.
 
Only one other state imposes a computer service tax — Connecticut, where the tax is just 1 percent — while Florida, Pennsylvania, and Massachusetts have repealed similar taxes.
 
In the Deep Freeze
 
O’Malley’s proposed FY 2009 budget maintains at $23 million the sum set aside for grants to investigators and institutions carrying out research on stem cells, even on controversial embryonic stem cells.
 
Maryland’s stem-cell program awards two types of grants: investigator-initiated grants of up to $500,000 per year for three years; and exploratory grants of up to $100,000 per year for two years.
 
During its first full year in operation in fiscal 2007, which ended June 30, 2007, the stem-cell fund winnowed a pool of 86 applications into the 24 grants awarded a share of the $15 million initially set aside for the program. The fund is among several seed funding programs overseen by the Maryland Technology Development Corporation, or TEDCO.
 
Also new in the proposed budget is $5 million for the Science + Technology Park at Johns Hopkins, which in April is set to complete its first building of 278,000 square feet at 855 N. Wolfe St. The project is a venture of Forest City Science + Technology Group and Presidential Partners, a minority-owned consortium of Baltimore developers, acting under the entity Forest City-New East Baltimore Partnership.
 
Scott Levitan, a Forest City senior vice president and development director with the Science + Technology Park, told BRN the $5 million would be used for tenant improvement costs connected with a permanent incubator planned as part of the project. He said the size of the incubator has yet to be set, but will be based on market demand when it is built later this year, replacing a temporary incubator space located adjacent to 855 Wolfe.
 
“We’re realizing a real strong demand for commercialization space for spinouts from Johns Hopkins,” Levitan said.
 
On Jan. 10, Forest City announced that BioMarker, an early-stage medical device and molecular diagnostics company, had joined the Johns Hopkins Institute for Basic Biomedical Sciences, the Howard Hughes Medical Institute, and Cangen Biotechnologies as tenants at 855 N. Wolfe St.
 
The $5 million can be used toward expenses at the developer’s discretion, such as building out space or creating an incubator, Mahan said. He said the grant was similar to one the state awarded a few years back for another Baltimore life sciences campus, the University of Maryland, Baltimore, BioPark, where a second 180,000-square-foot building is set for completion later this year. BioPark used its state money toward the cost of improving tenant space, an expense typically borne by lessees.
 
When completed, Science + Technology Park will consist of 1.1 million square feet, and anchor the first phase of a 31-acre mixed-use development that will also include more than 850 housing units for mixed-income buyers and renters, as well as retail space.
 
O’Malley has frozen at last year’s levels funding for two life science programs. The state’s Biotechnology Investment Tax Credit will remain at $6 million, and the Nanotech Biotechnology Initiative Fund will get $2.4 million.
 
The two-year-old fund supports the Maryland NanoCenter in College Park, Md., by helping pay for faculty attraction packages, as well as grants related to nanotechnology development. NanoCenter is a collaboration of three University of Maryland colleges: the A. James Clark School of Engineering; the College of Computer, Math, and Physical Sciences; and the College of Chemical and Life Sciences.
 
The Biotech Investment Tax Credit allows investors to recoup half their investments in “qualified” biotech companies, up to $50,000 for individual investors, and $250,000 for corporations and qualified Maryland venture capital firms. “Qualified” recipients have been in business up to 10 years, have been certified by DBED, have their “headquarters and base of operations” in Maryland, and have employed fewer than 50 people.
 
Eligible for the credit are individuals who invest $25,000 in a Qualified Maryland Biotechnology Company or a corporation that invests at least $250,000 in a Qualified Maryland Biotechnology Company. More details are available here.
 
Last year, according to DBED’s website, the biotech investment tax credit generated a total $12 million in investment for 19 Maryland biotech corporations, versus 20 companies in 2005 receiving a total of nearly $6 million.
 
The life sciences are among industries that could benefit from another proposal in O’Malley’s budget. The governor is asking lawmakers to create new economic development subsidies intended to hasten the conversion of military bases targeted for closure under the US Defense Base Closure and Realignment Commission into new campuses for businesses and academic institutions.
 
The BRAC Community Enhancement Act would create new “BRAC Zones” akin to the state’s existing Enterprise Zones, in which businesses that move into or expand within given areas qualify for a variety of tax cuts and credits. O’Malley has argued the BRAC zones would steer new development to already-built-out areas, thus promoting “smart growth,” the land-use paradigm that favors redeveloping existing sites rather than building new ones.
 
The zone’s goal, Mahan said, is to encourage new uses akin to the life sciences research taking place now throughout the state, in places such as the Edgewood Chemical Biological Center, within the Aberdeen Proving Ground. Aberdeen is slated for realignment under BRAC, with the base set to take in several military operations relocating from elsewhere — including units of the US Army Research Laboratory now in Virginia, Ohio, and New Mexico; and various chemical and biological defense research activities from Washington, DC, Virginia, Indiana, and Texas.
 
However, the Army Ordnance Center and School would move to Fort Lee, Va., while the Army Environmental Center would relocate to Fort Sam Houston, Tex. Overall, Aberdeen would gain more than 5,300 civilian employees but lose about 600 permanent military personnel, 300 civilian employees, and 2,800 military and civilian students by the time BRAC is fully implemented in 2011.
 
The BRAC bill also includes $3 million for workforce training programs.

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