Tucson Tech

2013-04-30T00:00:00Z 2014-07-02T12:03:40Z Tucson TechDavid Wichner Arizona Daily Star Arizona Daily Star

More Arizona technology companies could reap tax breaks for research and development, while some startups could find new seed funding, under pending legislation backed by the state's biggest technology industry group.

As Arizona's next state budget takes shape, the Arizona Technology Council and its allies are pushing legislation to expand state research tax credits and to create an insurance premium tax credit to help pay for high-tech business ventures.

The two separate bills have won bipartisan support, including key Republican leadership backing. But because each bill would potentially cost the state millions of dollars in state revenue, they're on hold amid the larger budget-writing process.

Here's a look at the two bills and where they stand:

• House Bill 2342 would raise the annual ceiling on the state's R&D tax credit from $5 million currently to $10 million in 2014 and to $15 million in 2015 and each calendar year thereafter.

The legislation - sponsored by House Speaker Andy Tobin, R-Dewey -passed the House on a 46-14 vote in February and cleared two committees in the Senate.

• House Bill 2646 would create a new dollar-for-dollar credit on premium taxes paid by insurers who contribute to a proposed "High Technology Business Investment Fund" to be overseen by the Arizona Commerce Authority.

The credits would be capped at $10 million in fiscal year 2015, $20 million in fiscal 2016 and $20 million in 2017.

That legislation passed the House in March on a 44-15 vote.

Both bills are part of ongoing efforts to boost high-tech development in the state, and in the case of HB 2646, to provide much-needed capital to promising tech startups.

The R&D tax credit bill is an attempt to capitalize on an already successful program, said Steve Zylstra, president and CEO of the 700-plus member Arizona Technology Council.

"We already have the best tax treatment for research in the nation," Zylstra said.

The tax credits were expanded in 2008, and in 2010 the credits were made refundable - meaning a company without income-tax liability to offset could get a cash refund instead.

That refundable credit was critical to helping early-stage technology companies, which typically haven't started bringing in profits, Zylstra said.

In the first two years, 93 took advantage of the program, reaping nearly $10 million in credits on more than $141 million in research spending, according to an Arizona Commerce Authority analysis.

One local company that took advantage of the tax breaks in 2011 and 2012 is Medipacs Inc., which has developed a small, wearable drug-infusion pump based on a patented polymer that drives the device by expanding and contracting.

Asked what the tax credits meant for Medipacs, company President and CEO Mark McWilliams had a one-word reply: "Survival."

The company has raised some $6.5 million in investor money to reach the advanced prototype stage and is still trying to raise the $2 million to $5 million it needs to reach the next step in commercialization, McWilliams said.

Because its needs are beyond the typical amounts invested by individual "angel" investors, and significantly less than the millions of dollars venture-capitalists are looking to invest, Medipacs faced a shortfall even within sight of the finish line, he said.

"It's the classic 'Valley of Death' syndrome," he said, citing a term commonly used for the chasm tech startups face between early seed money and venture capital.

Boosting the tax-credit ceiling would help more companies like Medipacs - which has research labs at the University of Arizona's Arizona Center of Innovation - grow and benefit the local economy, McWilliams said.

Like all legislation that affects state revenues, the tax-credit bill is hung up in larger budget discussions.

And that brings into play some strong feelings about tax breaks in general.

Rep. Warren Petersen, R-Gilbert, said he voted against the bill in committee and on final passage because he opposes special tax credits.

"Basically, I support broad-based tax cuts, and one thing that gets in the way of that is tax credits," Petersen said, adding that such credits by their nature favor some businesses over others.

Petersen opposes the insurance premium investment tax-credit on similar grounds.

A number of states have used premium tax credits to fund in-state investments through entities known as capital companies, or simply CAPCOs. Some states have dropped CAPCO programs after data showed that insurer investments largely fell short of job-creation goals.

The proposed Arizona plan differs because insurers pay money into a fund administered by the state, which would share in any returns on investments, Zylstra said.

By helping tech startups vault the "Valley of Death," the plan will help drive high-tech company growth and follow-on venture capital, which in turn will boost job growth and tax collections, he said.

"We need capital. Our members are forced to go out of state to find capital, and some of those companies end up moving to other states," Zylstra said. "We think this is the jelly in the middle of the doughnut that's been missing."

Contact Assistant Business Editor David Wichner at dwichner@azstarnet.com or 573-4181.

Copyright 2014 Arizona Daily Star. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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