Research and development is critical to the growth of any modern economy. It is how businesses stay ahead of their competitors, how new goods — and even whole new industries — are created. Whether the business is a start-up or a century-old company, continuous improvement — innovation — is necessary to stay successful. Wisconsin has made significant progress during the last decade to make sure our state is open for business.
One piece of this puzzle is making Wisconsin’s business climate more conducive to locating research and development operations here. Former Gov. Scott Walker and the legislature started down this path by making Wisconsin’s Research Tax Credit (R&D tax credit) partially refundable. It’s time to build on this success and make the R&D tax credit fully refundable.
When companies decide where to invest in expensive technology and skilled employees, they look at the total cost of the investment. Thirty-seven states have some sort of R&D tax credit. Competing for high-skilled workers in a global economy is a massive challenge for businesses. This is especially true for Wisconsin.
Manufacturers in rural and northern parts of the state have to pay a premium to attract highly skilled workers such as engineers. An effective R&D credit can help Wisconsin employers lower the cost of attracting these employees, making it feasible for Wisconsin businesses to make these types of investments. These employees then in turn buy homes, invest in their communities, and pay Wisconsin taxes.
However, Wisconsin’s R&D credit currently does not create this incentive efficiently. Wisconsin will lose out to other states without an effective credit that sets us apart.
In 2017, Gov. Walker and the legislature recognized this concern and took a first step toward remedying it by making the R&D Tax Credit 10 percent refundable in the 2017-18 State Budget. With this change, Wisconsin joined 13 other states that have a partially or fully refundable credit, including neighboring Iowa where the credit is fully refundable. This targeted tax reform was an inexpensive (approximately $9 million per year) way to push high-skill, high-wage job creation in Wisconsin.
Detractors of refundable tax credits often argue they do not stimulate the desired activity, however this is not true with the R&D credit. The R&D tax credit is structured in a manner that only incents new investment. The credit is only awarded to claimant companies that continuously invest in new research and development. Specifically, a threeyear rolling average of the claimant company’s qualified research expenses are measured. A claimant company can then claim a credit equal to 5.75 percent of the expenses which are above and beyond 50 percent of that average. Therefore, if your Wisconsin research and development expenditures do not keep increasing, you cannot claim the credit. A refundable R&D credit protects taxpayers and incentivizes job creation.
Further, detractors will also argue that these types of tax credits only help big business. The idea that refundable credits only help established large companies is also false. One sector of key recipients of the value of a refundable credit — who currently do not receive the non-refund- able portion — are startup companies. While making strides, Wisconsin lags behind the nation in business startups. A lack of necessary capital for investment is often a key rationale cited for this lag. A refundable tax credit would provide a direct capital injection into a sector of companies that is largely research and development based. Making the credit fully refundable is an inexpensive way to help startup companies succeed in Wisconsin and create the next generation of products, processes and services that keep Wisconsin businesses competitive and high-paying jobs in the state.
The R&D tax credit does not discriminate. Whether a small business, large corporation or startup, they receive the credit as long as the company makes qualified research expenditures.
In 2019, increasing the refundability of the credit to 20 percent was included in Gov. Tony Evers’ budget proposal and supported by a bipartisan coalition of legislators but ultimately was not adopted. This setback is only temporary. Making the R&D tax credit fully refund- able will spur innovation in Wisconsin encouraging startups and established companies alike to create high-skilled, high-paying jobs and plant the seeds for future economic development in our state.
Cory Fish is general counsel and director of tax, transportation and legal affairs with Wisconsin Manufacturers & Commerce, Madison. His commentaries are published regularly in the Wisconsin Business Voice, a WMC publication.