Tax Credits: Why states like Pennsylvania and New Jersey are leading the pack in technology-based industries

In order to remain competitive in the 21^st Century, the United States needs to begin to invest heavily in technology-based industries. These technology-based industries include biotechnology companies, network and communication companies, pharmaceutical companies, and other high tech companies.

Given the recent economic downturn, many states have begun to invest in economic development initiatives that are aimed to promote job growth in technology-based industries. Namely, Pennsylvania has allocated $55 million for research and development tax credits as a way to boost its life sciences and manufacturing technology industries. New Jersey has funded 100% of its research and development tax credit, meaning that funding is available to all of the companies that are eligible. Other states have begun to follow suit, but not nearly on as wide a scale as these two states.

The Research and Development tax credit was created in 1981 to incentivize advances in technology-based industries. These tax credits are particularly useful for start-up companies due to recent simplifications in tax codes.

Another major tax incentive available to companies is the Angel Investor tax credit. Angel investors are wealthy individuals who invest in start-up companies. The premise of the tax credit is that by offering tax incentives to these individuals, they are then free to make further investments in other companies, thus providing a boost to the economy. A report released by the Wisconsin Economic Development Corporation found that 930 full time jobs had been created from angel investor tax credit funds since the program was instituted in 2005. Angel investor tax credits are perhaps the most controversial form of economic development, with many economists suggesting that they don’t spur economic growth beyond what would occur without any form of incentive. However, entrepreneurs argue that they are the most beneficial tax credit and work precisely the way they’re designed to.

While these tax credits have proven to be beneficial to many states, others are exploring new methods for promoting job growth. Virginia, for example, has created a small business jobs grant fund. This program offers grants to companies that are able to create five new full-time positions and make a new capital investment of at least $100,000. The program, which was originally created in 2010, has seen great success and the state is looking for ways to expand the program.

Over the course of the last 40-50 years, the number of tax incentives offered by states has increased dramatically. As a direct result of the increase in tax credits, the tax wedge has decreased during this time. Many, but not all (corporate tax rates are also factored in), of these states that offer a large number of economic development-oriented tax credits are considered to be the most business-friendly states in the country. Tax credits and other incentives, according to recent statistics; appear to be the best solutions for boosting economic development within our communities. States need to continue to invest additional funds in these forms of economic development in order to spur job growth and boost the economy.

Guest Contributor: Matt Wertman

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