Tax credit for biotech resurfaces

Jan. 28, 2005
Catherine Dolinski
Staff Writer,  Gazette Newspapers

Momentum appears to be building for a biotechnology tax credit that legislative committees and the Ehrlich administration panned last year as being too expensive.

Gov. Robert L. Ehrlich Jr. (R) included a tax credit to encourage investment in biotechnology and related fields in the fiscal 2006 budget and legislative agenda he released last week.

Under the governor's plan, investors can claim a tax credit of up to 45 percent of an investment in a qualifying technology company, up to a maximum of $100,000 per investment or $200,000 a year.

The proposal includes several delay mechanisms to spread out the cost of the credit. Investors may claim one-third of the total amount of the tax credit each year for three years and cannot begin to claim it until three years after the investment is made.

Ehrlich's plan borrows heavily from an existing proposal from Del. Brian J. Feldman and Sen. Jennie M. Forehand, who sponsored the measure in 2004.

Feldman (D-Dist. 15) of Potomac also came up with a delay mechanism for the tax credit last year, but not in time to save the plan from an unfavorable committee report.

Feldman and Forehand say they are going to file their own proposal next week, regardless of the governor's initiative. Both applauded Ehrlich for embracing the concept and said the important thing is to get a bill passed -- although Forehand (D-Dist. 17) of Rockville noted that past governors who supported legislators' initiatives "let the legislators go ahead and pass the bill and promise to support it."

There are a few key differences between the two bills, Feldman said. The Feldman-Forehand version restricts qualifying investment to the biotechnology field, whereas the administration's language spreads the credit over a range of scientific fields, such as nanotechnology.

Also, Feldman's bill entitles companies -- particularly venture capital investment firms -- to take advantage of the credit, while Ehrlich's appears to apply only to individual investors.

The distinction is important, Feldman said, in light of the fact that Maryland has dropped in national biotechnology rankings and is lacking in investment firms.

The state also will be able to recoup some of the plan's cost, Feldman said, via a provision in his bill requiring venture capitalists who claim the credit and then hit the jackpot with their investments to return some of the profit to the state.

"The bill gets at the issue, but with minimum impact to the state," he said, noting that cost was the main objection last year from lawmakers as well as Budget Secretary James C. "Chip" DiPaula Jr.

Ehrlich's legislative agenda also includes the resurrection of the research and development tax credit that expired Jan. 1. Ehrlich is calling on lawmakers not only to re-institute the $6 million incentive, but to double it. A bill from the Department of Business and Economic Development to extend the life of the tax credit failed in the Senate last year.

Passing on the HMO tax

Democratic lawmakers are complaining about a decision by some of Maryland's largest health maintenance organizations to raise their premiums in response to a new 2 percent HMO premium tax.

Aetna, Kaiser Permanente and MAMSI say they are passing on the full cost of the tax to their policyholders. CareFirst BlueCross BlueShield has not said what it plans to do for its HMO users, but the company has indicated that it, too, is likely to pass along the cost.

The legislature passed the tax on HMO premiums during a special session in December as a funding source for medical malpractice reforms. The premium tax, which has long applied to non-HMO health insurance products, went into effect this month and is expected to generate $60 million to $70 million annually to increase Medicaid reimbursement rates and offset the rising cost of liability insurance for doctors.

Ehrlich vetoed the bill, largely on the basis of the HMO tax, but the legislature overrode that veto on Jan. 11. Within days of the override, MAMSI began notifying policyholders that its premiums would increase in March by 2 percent. Aetna intends to raise its rates in March for most of its members, and in April for small employers. Kaiser, too, will raise rates on April 1.

Throughout the fall, Ehrlich cautioned the legislature against the tax, warning that it would pass through to consumers. Many HMOs indicated the same; some, such as MAMSI, had warned policyholders of a rate increase in 2003, the last time the General Assembly passed a premium tax bill; Ehrlich vetoed that bill.

But Democratic lawmakers argued last year that market forces could keep HMO rates down in spite of the tax. House Speaker Michael E. Busch (D-Dist. 30) of Annapolis was particularly critical of threats by HMOs to raise their rates, in light of the large salaries earned by their executives and the large surpluses that many of the HMOs have accumulated.

"I haven't seen those record profits go toward lowering premiums," the speaker said on the eve of the December session. "These companies are taking money out of the health care system ... This is an issue of corporate wealth over community."

Ehrlich said lawmakers should not be surprised by the HMOs' decision, given all his warnings. But this week, House and Senate leaders excoriated Maryland Insurance Commissioner Alfred W. Redmer not only for approving the increases, but for seemingly encouraging them and failing to hold public hearings on them.

Redmer denied the allegations Wednesday, however, saying that he followed established departmental procedure in approving the rate increases.

Delaware loophole, Part II

Last year, Ehrlich sponsored and then reluctantly signed a measure to close the so-called Delaware tax loophole, which allowed corporations to shelter otherwise taxable profits in holding companies set up in other states.

This year, the administration wants to water down the measure, which DBED says unfairly punishes the use of holding companies for legitimate purposes. This year, however, the administration's proposed holding companies legislation does not appear among Ehrlich's legislative priorities.

"It's still there," DBED Secretary Aris Melissaratos said of the proposal. "We'll push it as a department."

The Maryland Chamber of Commerce is also backing the bill, but is not worried about the issue dropping down to the department level, said spokesman William Burns. "We wouldn't be up in arms about the fact that the governor has handed it down to DBED," he said. "It's an appropriate place for the legislation to be handled."

The de-emphasis has not dulled the opposition from Comptroller William Donald Schaefer (D), who has vowed to fight any attempt to pry open any part of the tax loophole.

"It doesn't matter where it comes from; it's a mistake," said Schaefer spokesman Michael D. Golden. "The state would suffer a tremendous loss of revenue. The comptroller said to the governor back in September that we would fight any efforts to reopen those loopholes that were closed last year."