Target research with surplus state dollars

Editor’s note: This is the third in a series of Monday editorials that will examine the state budget surplus.

Their 1998 session began last week, and now lawmakers have very little time to act. Legislators must decide how to spend the state’s $1.3 billion surplus amid a confused session, with the race to succeed Gov. Arne Carlson already underway and in the shadows of presidential scandal and the state’s tobacco lawsuit. Legislators have not much more than a month to finish committee work and until March to pass any legislation. They will have to work fast and without the public attention state business deserves.
And the surplus they will spend could be the last major windfall before the next recession.
In their deliberations over the next few weeks, lawmakers must consider the state’s needs for the next decade or so. They need to focus on ways to help the state weather the next economic crunch and get the state back to work quickly. One way Minnesota can recession-proof its economy is through new investment in research and technological development. Minnesota is already strong in new technologies, but there is a lot the state can do to increase private development. Legislators ought to set aside between $200 million and $300 million for this purpose.
Right now, electronics, computerized equipment and precision tools account for 55 percent of the state’s manufactured exports. These are the technology leaders, the firms and products that can bring renewed capitalization into an otherwise stagnant economy. Even if unemployment goes up and growth slows down, hospitals will still need precise digital equipment. Many industries will likely use a future recession as a good opportunity to re-tool their production. They will need new technologies and new products. Minnesota can produce those products if we invest in developing new technologies.
An easy way to do it is to use about $250 million as seed-money for a research and recapitalization tax credit. Annually, the state corporate income tax rate is 9.8 percent of a firm’s net income, which earns Minnesota just over $700 million a year. Legislators ought to offer to pay for 10 percent of new business research, up to the full amount of taxes a firm would otherwise pay. That would amount to forgiving a firm up to one year’s taxes if it engages in new technological development. The credit could be phased in over two years to allow the state to earn interest on the $250 million it banks this year and phased out over a similar period so that it doesn’t become a permanent tax break.
Additionally, such a phase-in and phase-out approach will target the money at research conducted between the years 2000 and 2003. That period is at the far end of the foreseeable economic future, and even if a recession doesn’t hit before then it will likely follow soon in the next decade. Research begun within the next few years is likely to mature either during or immediately after the next economic bust. That will be when new jobs dealing with new technologies and products are needed the most.