Thursday, the New Hampshire Senate unanimously approved a bill that increases the state’s research and development tax credit funding from $1 million to $2 million beginning this year. Last year, 111 qualifying businesses shared that $1 million – so that the 58 businesses who qualified for the maximum credit of $50,000 received $12,065 each.
In New Hampshire, R&D tax credits are available to businesses that pay wages to employees whose research is “technological in nature,” and “intended to be useful in the development of a new or improved business component.” The federal government also offers businesses an R&D tax credit, which can also be used against supplies and services, not just wages.
One big misnomer, national tax expert Dean Zerbe says, is that only large manufacturing firms can qualify. He says small and medium sized businesses – doing anything from architecture to software development to medical device technology – can qualify for both federal and state R&D tax credits. Zerbe is a former senior council to the U.S. Senate Finance Committee, and currently works for alliantgroup, a business tax services company.
According to Zerbe, New Hampshire is “just catching up” to states like Minnesota, California, and New York, which have more “robust” R&D tax credits that include refunds for startups that invest in research, but are not yet profitable.
What R&D tax credits do for New Hampshire and New England
Businesses receive R&D tax credits based on the previous year’s expenses. Exactly how these credits then influence business’ behavior is uncertain. One study done by the Federal Reserve Bank of San Francisco estimates that over the long run, reducing the cost of R&D for businesses by 1 percent in a given state would increase R&D spending in that state by 2.5 percent. The study also found that state-wide R&D tax credits are a “zero-sum game,” meaning that what one state gains in R&D spending, another state loses. In that way, New Hampshire’s bill – while modest — may decrease R&D spending for Massachusetts, Vermont, and other nearby states.
While business tax credits may increase states’ competitiveness, they don’t pay for themselves. In a 2009 report by the Federal Reserve Bank of Boston, authors say “business tax credits do lead to new revenues for state government, but not enough to completely offset the initial costs.”
Opponents to R&D tax credits argue not only is it hard to measure the effects of tax credits, but states that do offer generous business tax credits are ultimately paying for them by underfunding infrastructure — a move that could ultimately be bad for economic development.
Likely outcomes for SB01
The bill has bipartisan support from Democrats and Republicans, Governor Hassan, and received a unanimous vote in the Senate. The bill’s sponsor, Republican Senator Bob Odell, says a similar bill failed to become law last year, when the House tried to add an amendment having to do with abortion, in committee of conference. But, he says, he’s “very, very confident” the bill will pass both chambers this time around.
(This post was updated to reflect the outcome of Thursday’s Senate vote).