State budget could ax key tax perks; local tech leaders push back

Earlier this month, Pennsylvania’s Office of Innovation and Investment hosted an informational seminar in University City centered on two tax credit programs: the Keystone Innovation Zone (KIZ) program and the Research and Development (R&D) Tax Credit. Both are aimed at attracting young tech entrepreneurs to Pennsylvania.

The afternoon session was full of optimism and high-spirits as state Economic Development Consultant Colton Weber spouted a long list of lofty numbers, including a $55 million budget for the R&D Tax Credit program, which provides a transferable tax credit for companies investing in research in fields like inventing, medical devices and software; and $16 million for the KIZ program, which provides up to $100,000 in transferable tax credits to growing tech companies that are located within certain geographic parameters. (Much of Philadelphia is a Keystone Innovation Zone, actually, including University City, Center City, the Navy Yard and almost everything north of Girard Avenue.)

But the seminar, and those numbers, now seem a lifetime away, as the state House of Representatives drafted a budget proposal last week that would put these two programs — along with some ten others — on a two-year hiatus.

The cuts are part of a broader $29.1 billion state general fund budget for the 2014-2015 fiscal year, which must be finalized before Tuesday. The proposed budget, which would represent a $536-million increase over this year’s budget, would still be $300 million less than what Gov. Tom Corbett proposed in February.

The tax credit hiatus would result in savings as high as $180 million. The bill, House Bill 2188, is now under review in the Senate.

Not surprisingly, the potential move has some members of the Philadelphia tech sector up in arms.

“Those [tax credits] were a big deal in keeping us in Center City Philadelphia, as opposed to across the river in that newly developed technology corridor in Camden,” said Jeff Mathis, CFO of Center City-based Adminovate, which provides insurance policy administration systems. Mathis’s company has received credits through the KIZ program, and plans on applying for the R&D credit next year. He’s also one of a growing number of tech executives who have expressed concern over axing the tax credit.

“It helps us continue to hire more folks to build out our platforms, because some of the cost is mitigated by these credits,” Mathis said. “A $100,000 tax credit means we’re going to hire two more people.”

Other tech execs have contacted their state representatives in hopes of gaining support in Harrisburg.

In one such letter, longtime Philadelphian Rick Rasansky, founder of real-time feedback app Yorn, made it clear that cuts to the tax credit programs might force his business to consider relocating to other states.*

“Many surrounding states are offering us incentives to move our business and in the competitive landscape we operate, our margins are dictated by not only how well we run our business, but more recently, from where we operate our business,” Rasansky wrote. “These credits are crucial benefits will help us hire and retain employees in PA and enable future expansion and growth of our company here – not in NY or DE.”

Rasansky also told Technical.ly that losing the tens of thousands of dollars his company receives through the KIZ program might lead to a hiring freeze. Extend that to other firms as well, and it’s bad news for a city that’s had trouble retaining college graduates, he said.

Similar concerns have been shared by many with a voice in Harrisburg, too — mostly among Democrats.

“When opportunity zones and tax credits that are designed to create jobs, innovate and spur competition go away, that’s certainly a problem for our economy,” said Cameron Kline, spokesperson for state Sen. Larry Farnese (D-Philadelphia). Farnese is minority chair on the state’s Communications and Technology committee.

“Frankly, when we’re near last in the United States when it comes to job creation, and we’re currently having a state-wide conversation about how we do things like fund our schools and invest in jobs, it’s certainly a concern,” Kline added.

He may have a point. According to a recent Congressional report, Pennsylvania’s private-sector employers added a mere 279,400 jobs — a 5.8 percent increase — since 2010, which ranks as the nation’s worst for private-sector employment.

Representatives from Philadelphia Deputy Mayor for Economic Development Alan Greenberger’s office would not comment on how these cuts might impact city businesses.

On the senate floor last Wednesday, state Sen. Lisa Boscola (D-Lehigh) spoke out against the cuts at length.

“House Bill 2188 would literally bring our economic development and job growth efforts to a screeching halt,” Senator Boscola said. “Last year, 202 Pennsylvania companies benefitted from this [KIZ] program, which largely encourages entrepreneurship and technology commercialization near colleges.” Boscola also cited the effectiveness of Innovate in PA, another incentive program, which has generated 7,845 jobs, she says.

While many in the Senate oppose these tax credit cuts, including Majority leader Dominic Pileggi (R-Delaware), the incentives may be part of a larger bargain to quickly raise revenue, given both parties’ inability to come to terms on issues like liquor sales and pension reform.

“The tax credit changes passed by the House have not been agreed to,” said Erik Arneson, a Pileggi spokesperson, last Friday. “They’re part of the ongoing budget discussions.”

But not everyone sees these tax credits as being so fundamentally vital to the Philadelphia economy in the first place.

“Are [Keystone Innovation Zones] worthwhile in the first place? Like any economist, I’ll say it depends,” said Robert Inman, a finance professor at Penn’s Wharton School, who has also done tax-policy consulting for the City of Philadelphia. “The big issue with these things is, are they going to be a sufficient stimulus not just to attract a few firms, but to attract firms that will lead to a significant stimulus in attracting additional firms? There the evidence is very mixed.”

Whether or not these programs have much merit in the larger scheme of things, it’s clear that many local tech entrepreneurs and politicians alike will be monitoring the progress of this new budget.

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*Update, 4:45 p.m.: An earlier version of this article mistakenly listed New Jersey as a state Rasansky might consider relocating to.