Should a $12 million biotech investment tax credit be evaluated by whether investment has increased across a state’s biotechnology industry or by whether it helps individual companies increase their access to capital?
Late last year the Maryland Department of Legislative Services released two draft reports: Evaluation of the Biotechnology Investment Incentive Tax Credit and Evaluation of the Research and Development Tax Credit. The reports recommend eliminating both tax credits, but supporters within and outside the state disagree.
This article reviews the biotech tax credit study and is part of an occasional series on incentive evaluation reports.
Biotech tax credit evaluation
The Biotechnology Investment Incentive Tax Credit “supports investment in seed and early stage biotech companies to promote and grow the biotech industry in Maryland.” According to the Maryland Department of Commerce, this incentive program provides investors with refundable income tax credits generally equal to 50% of an eligible investment in a Qualified Maryland Biotechnology Company. The annual budget for the tax credit has been $12 million since FY15.
The biotech tax credit evaluation report concludes, “There is no evidence that the credit has increased investment in the biotechnology industry.” Specifically, there continues to be a venture capital gap between Maryland and states like California and Massachusetts, there has not been a statistically significant increase in industry investment, and the credit has not increased the total number of active biotechnology companies in Maryland.
The draft report offers several program management recommendations, but I focus here on the approach to legislative intent and performance metrics (Chapter 2). I do so because I often use this tax credit program as an example of an incentive with a specific goal (to help the state’s early stage life sciences companies raise funding) that has been assessed according to other metrics (such as number of jobs created) during its lifespan, raising questions about how to evaluate similar programs.
Should the metrics focus on supporting investment in companies or should they focus on growing the biotech industry? And exactly how should either of those outcomes be measured?
What is the program’s intent?
The original legislation did not define the tax credit’s goals or performance metrics, and there is a divide in understanding the biotech program’s intent.
Program language, Department of Commerce professionals and other organizations focus on the narrow purpose of supporting early stage and start-up companies to access capital. Specifically,
Commerce stressed that the intent of the program was to benefit “early-stage and startup” companies and that, to date, the program has been effective In “ensuring Maryland’s most promising young biotechnology companies [were] able to secure investment capital.” (11)
By contrast, the report cites testimony from outside advocates and entities such as the Maryland Chamber of Commerce, Johns Hopkins University and the Tech Council of Maryland to take a more expansive view of program intent. Developing new businesses, creating high paying and sustainable jobs, developing and preserving intellectual capital in the state, attracting and retaining businesses, developing and spreading the industry across Maryland, and increasing tax revenue to the state – in addition to supporting access to capital for research activities – are among the benefits touted by tax credit advocates.
After reviewing this evidence, the DLS draft report concludes that the credit is intended “to encourage the growth of the State’s biotechnology industry and stimulate private-sector investment in the State,” not simply to help companies secure investment capital.
Measurement and evaluation in an evolving environment
Three common evaluation problems emerge from this review of program intent:
- The lack of clearly stated objectives make incentive program evaluations difficult, a theme that has been well-documented. All parties want to make the state’s incentives more effective, but effective at what remains an open policy question.
- Much of the testimony cited in the discussion of the tax credit’s intent occurred during legislative proposals to expand the definitions, criteria and eligibility for participation. In at least one case, the Commerce Department opposed program expansion, which was approved by the legislature anyway. Changing the rules can confuse or dilute the original intent.
- Expansive language on expected program benefits can be at odds with the scale, scope and rules governing incentive programs. In this case, advocates touted everything from creation of high-paying jobs to expanding the biotech industry to rural parts of the state. Meanwhile, the Commerce Department and others emphasized a more narrow objective of improving access to capital for early stage companies. The DLS report took a middle ground approach, agreeing, for example, that the credit should not be viewed as an employment credit, but still striving to assess impact on industry investment and company growth.
Our recent work with the Center for Regional Economic Competitiveness on economic development program performance measurement takes on this last point, making the case that considering program results along with but apart from broader economic measures is a sensible approach.
We also separated program indicators with a direct link to economic development activities from those that represent broad economic outcomes. The presumption is that modest-sized state or local economic development initiatives are more likely to influence specific business activities among a targeted group of firms than to “move the needle” on an entire economy. While economic development organizations focus much of their performance monitoring on tracking program outcome indicators, monitoring broad economic indicators can guide policy makers in determining which program activities are most relevant to current policy priorities.
Redefining Economic Development Performance Indicators for a Field in Transition, p. 4. July 2017
In other words, incentive programs should be connected to but not held fully responsible for overall industry or economic performance. Broad economic indicators should be monitored, but reasonable expectations need to be set on program-specific outcomes.