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Does Minnesota's research tax credit pay? Bills propose streamlining the process to help

Minnesota: Land of innovation. From pacemakers to supercomputers to Post-It notes, the state is known for inventing ways of solving problems. But how much does tax policy have to do with that?

If you haven’t considered that, be assured that the House Taxes Committee has. In fact, it was the topic of a very robust discussion Wednesday as members debated the merits of modifying the state’s research and development tax credit. It laid over two identical bills for possible inclusion in the omnibus tax bill: HF1445, sponsored by Rep. Kristin Robbins (R-Maple Grove), and HF1455, sponsored by Rep. Duane Sauke (DFL-Rochester).

Both bills are focused upon streamlining the filing process for claiming the credit. Patterned after an option available under federal law called the alternative simplified credit, it would allow companies and entrepreneurial inventors to use half of their average research and development expenditures of the past three years and apply a single tax credit rate of 6 percent while calculating their credit.

The Department of Revenue estimates the change in tax law would bring $21 million less into the General Fund in 2020.

The respective Senate companions — SF2720, sponsored by Sen. Paul Anderson (R-Plymouth), and SF996, sponsored by Sen. David Senjem (R-Rochester) — await action by the Senate Taxes Committee.

Minnesota was the birthplace of the state research tax credit in 1981, and many states have modeled similar policies after it. But a 2017 Office of the Legislative Auditor report concluded that, while it increases jobs and earnings, the credit doesn’t pay for itself, saying, “its net fiscal benefits only offset a small share of the amount of credit claimed.”

So would the bills laid over increase the tax credit’s impact? Perhaps, as another conclusion of the auditor’s report was that taxpayers didn’t know enough about it and could use guidance to get through its more complicated elements.

“The data from that report cut off at 2014,” Robbins said. “In the more recent data, in 2017, it showed that there was a $50.2 million increase in credits on the corporate side and $18.5 million on the individual side. … Many of these companies have a footprint all over the world, but this incentivizes them to do that research in Minnesota.”

The hearing served as a forum for several engaging stories about how now world-famous inventions started in Minnesota garages and basements. Sauke spoke of the current leader in the race for the world’s fastest supercomputer being at IBM’s Rochester facility and Mayo Clinic research developing cells that help a degenerating heart heal itself.

Rep. Lyndon Carlson Sr. (DFL-Crystal) posed the question of whether state dollars should concentrate more on the “basic research” at the University of Minnesota rather than the “applied research” that private companies generally conduct.

Rep. Aisha Gomez (DFL-Mpls) said she believes that since the public shares the risk it should also share the benefit, to which Rep. Greg Davids (R-Preston) replied, “The state is sharing in this just fine. When these companies make their millions, the state gets its cut off the top every time.”


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