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R&D Tax Credits

America’s Innovation Zones

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What exactly is an “innovation zone”? There’s no set definition because each jurisdiction is different. In fact, there’s not even a set name—some regions will use terms like “district of innovation” or “research park.” However, the underlying concept remains the same: a designated geographic area or region where rules, regulations, and incentives are tailored to spur innovation, promote technological advancements (particularly in technology and biotech sectors), attract investment, and drive economic development.

About half of U.S. states have established these kinds of programs—including ones that might not instantly come to mind, like Arkansas, Georgia, Idaho, Kentucky, and Mississippi. Interestingly, there’s a relative dearth of such zones on the West Coast.

In this article, we zero in on two of the most noteworthy state-level plans—and contrast them with a faraway nation-state that’s very much a player in this area.

New Jersey: Generous and Forward-thinking

New Jersey’s innovation zone program, which intersects with the state’s R&D tax credit scheme, is as innovative as the tech and biotech companies it aims to assist.

The program allows qualified companies to sell a portion of their net operating losses (NOLs) and R&D tax credits to qualifying, profitable entities. This benefits both parties: The selling company (typically a startup) gets much-needed cash now, instead of a carry-forward tax benefit at some future date. The buying company (typically a profitable, unrelated enterprise) gets to use those credits to offset its current-year tax liability.

There are plenty of limitations, rules, and eligibility criteria applicable here, but the benefits and innovative nature of the program make it well worth looking into:

  • Qualifying companies: Only technology and biotech companies with filed patents or licenses to use protected intellectual property can participate in the program.
  • Employment threshold: Companies must have fewer than 225 employees, including related entities. Minimum employment thresholds also apply.
  • Monetization limits: The unused NOLs and tax credits must be sold for at least 80 percent of their value, with an annual cap of $75 million—$10 million of which is set aside for businesses located within NJ’s designated innovation zones.
  • Lifetime benefit limit: There’s a maximum lifetime benefit limit of $20 million per business.

By monetizing these unused NOLs and tax credits immediately, companies can access much-needed capital for further R&D endeavors. The program’s eligibility criteria ensure that qualified companies can maximize the value of their tax benefits while stimulating innovation and economic growth within the Garden State—a win-win for all parties, at minimal cost to taxpayers.

Nevada: A Bold Proposal With a Short Lifespan

Early in 2021, Nevada put forth an innovation zone proposal that was so radical that the bill was withdrawn in less than a year. But the effort is worth looking at, because in some ways it was as innovative and unusual as New Jersey’s program. And—who knows?—it might still see the light of day, in some form, in some state.

The controversial proposal would have allowed companies to establish their own self-governing political subdivision within the state, separate from the county they would otherwise be part of. It would grant those companies administrative control—including tax collection, courts, utilities, even school districts—in the form of a newly established government within the company’s designated area. The marquee company this proposal was meant to benefit is a Nevada-based tech firm called Blockchains LLC: its plan was to develop a “smart city” in Northern Nevada intended to “fully run on blockchain technology.”

Critics howled, calling the proposal a sort of “neofeudalism,” while arguing that instead of increasing competition in Nevada, it would hinder it by favoring a single company. Blockchains withdrew its plan in October, 2021.

While some viewed the controversial proposal as a potential catalyst for attracting large companies to the state, enticing high-tech talent to relocate while invigorating local economies, in the end the skepticism of its many critics (including tribal groups and rural governments), who questioned the concentration of power—and potential neglect of residents and other businesses in the region—prevailed.

Still, Nevada’s proposal brought to light, perhaps inadvertently, the complex dynamics between corporate autonomy, local interests, and government control—a conversation that is by no means ended.

China’s (Very Different) Approach

Innovation zones are not the sole province of a handful U.S. states, of course. China has long been in this game, part of its long-term goal of global leadership in emerging technologies. Since the 1980s it has embraced its own network of innovation zones—promoting extensive research, investment, and development in designated locations, spread across various cities and provinces. China’s innovation zones align with its national ambition to lead the world in AI by 2030.

Unlike the tax-incentive-driven, grass-roots model of regional innovation experiments we’ve discussed here in the United States, China’s programs are large-scale, top-down, command-and-control affairs, where the focus is less on tax incentives and more on providing resources, investment, and support for innovation within the designated zones. The government also typically controls the allocation of resources, administration of public services, and influence over school districts within the zones.

The closest comparison we have at the federal level is the CHIPS and Science Act, which President Biden signed into law in August 2022. The bill aims to promote research and development in advanced technologies in the United States—specifically earmarking nearly $170 billion in funding for R&D initiatives over a five-year span.

The Way Forward for Innovation Zones

Open or closed? Bottom-up or top-down? Local or federal? One thing is clear: as competition—among rival companies, cities, states, and countries—continues to heat up, innovation zones and their various incarnations are here to stay. The real competition, perhaps, will be in how innovative (and fruitful) each model proves to be.