🔒CT’s yo-yoing R&D tax credit, a key incentive for bioscience sector, is back on the upswing

State lawmakers have rewarded bioscience companies with a boost in tax credits after what may be the broader industry’s most significant year in modern history.

Connecticut’s research and development tax credit program, which incentivizes R&D investments in the state, will increase in value over the coming two years, following a last-minute tweak lawmakers slipped into their expansive “budget implementer” bill last month.

The change, now signed into law by Gov. Ned Lamont, will increase on a relatively swift schedule the amount of state tax liability companies are allowed to offset with their R&D credits in a given year. That percentage would climb from 50% to 70% over the next two income years (2022 and 2023).

Bioscience advocates are enthused. They say the R&D credit helps startups weather a long product or drug development process that can take 12 years or longer to reach profits, if any come at all. They also say a more competitive credit could help attract new investments to the state, and help keep existing companies from moving.

Nicole Wagner, CEO of Farmington-based LambdaVision, which is developing an artificial retina, said her company has made use of the R&D credit in recent years.

“For small businesses, like LambdaVision, these credits help to support continued R&D, which is critical for the development and commercialization of new technologies,” Wagner said.

William Claffey, a partner at Glastonbury-based accounting firm Fiondella, Milone & LaSaracina, which counts biotech startups among its clients, testified to lawmakers in March that the R&D credit takes aim at an industry that raises and spends a lot of money.

“... we see a lot of their [profit and loss statements], we see a lot of their trial balances and balance sheets, and one thing I think is true is that biotechnology companies are spenders, they tend not to be holders,” Claffey said. “It’s the nature of the industry — move forward or fall behind.”

Paul Pescatello, executive director of the Connecticut Business & Industry Association’s Connecticut Bioscience Growth Council, said the tax credit tweak was a positive development for his constituents, and he particularly appreciates the timing.

A number of bioscience and pharmaceutical companies with Connecticut operations — with Pfizer ultimately emerging as the most prominent — played roles in the scramble to develop COVID-19 vaccines that were ultimately approved for use in human patients less than a year after the novel coronavirus reached the West Coast.

“Seeing what this R&D engine can do is amazing,” Pescatello said. “If there was ever a year to kind of take stock of this industry, this is it.”

While bioscience firms are a key beneficiary among the estimated 160-plus companies that benefit from the R&D tax credit, aerospace companies and others are also credit generators.

The more favorable terms for R&D companies will cost the state an estimated $23.7 million in the next few years, a relatively modest sum compared to Connecticut’s $46.3 billion biennial budget, but Pescatello said it will make a difference — if the change holds.

Law today, gone tomorrow

Since 2015, state lawmakers have grappled with some major deficits, and as they’ve picked apart the state’s expenditures seeking to close the gaps, the R&D credit has often found itself in the crosshairs.

From 2002 through 2014, companies could offset 70% of their tax liabilities with R&D credits, but that changed in 2015, when lawmakers lowered the cap to 50%, freeing up more than $76 million in tax revenue. Later that same year in a special session, legislators reversed course, agreeing to a phased increase of the cap back up to 70% over the next four years.

It never quite got there, reaching 65% before the 2019 legislature canceled the final jump to 70% and instead knocked the cap back down to 50%, generating an estimated $56 million in state revenue gains for the biennium that concluded last month.

Pescatello, a registered lobbyist, has ridden that roller coaster at the Capitol over that period, and he says it sends an uncertain message to companies about investing here and makes it more difficult to project the cost of doing business.

“It’s definitely made it more difficult to recruit companies here and to capture the expansions,” he said.

Pescatello is quick to note that Connecticut’s R&D tax credit structure is mostly competitive with other states.

“The most problematic thing about [the credit] is how much it’s been in play,” he said.

Connecticut’s R&D incentive, he said, is on par with those in Massachusetts, where the Cambridge area has grown into a dense life sciences hub over the decades, helping it poach a few companies from Connecticut, including the headquarters of Alexion in 2017 (the rare drug maker has maintained a New Haven presence since its move and is now being acquired by AstraZeneca).

So while incentives aren’t everything, Pescatello still worries about losing ground in future budget sessions. He’s well aware that approximately $6 billion in federal COVID-19 recovery funding helped lawmakers avoid having to make as many tough choices in this session’s budget deliberations. They could be hacking at various line items in order to close a deficit soon enough.

“And every time that happens, they talk about the R&D tax credit,” he said.

Stockpiling credits

Connecticut’s R&D tax credits range from 1% to 6% of a company’s total R&D investment in a given year.

Companies can claim those credits against their state income tax liability, or if the value of the credits exceeds their tax liability, they can carry the credits forward into future tax years, while smaller companies can sell them back to the state at 65% of their value.

Using R&D credits, Connecticut corporate tax filers have reduced their state income tax bills by nearly $60 million over the past decade, according to data from the Department of Revenue Services.

Companies are carrying a much larger stockpile for future use, nearly $1.8 billion as of 2018, according to the most recent available data.

In 2017, lawmakers created a program that would allow holders of those so-called “stranded” credits to enter into agreements with the state to exchange some of them — up to $50 million total — if they pledge to invest in hiring and expansions.

The program was modeled after a custom deal the legislature approved for Pratt & Whitney in 2014, allowing the jet-engine maker to use $400 million in stranded credits to build a new headquarters in East Hartford, in exchange for staying there for at least 15 years.

Since 2017, only one company — ASML US LLC — has used the program, according to an early 2020 report from the Office of Legislative Research.

The chip-making equipment manufacturer inked a deal with the state in 2018 related to an approximately $93 million project in Wilton that includes a new parking garage and facilities expansion and renovation. Under its agreement with the state, ASML was allowed to use $6 million in stranded credits toward the project, which also received other state incentives.