Amgen jolted the Seattle community with a stunning, unexpected announcement last month that they are pulling out of Washington State and terminating employment for the remaining 660 employees as part of a downsizing of 2,900 employees nationally.
My first reaction to the news was pure sympathy for the employees and their families. During a recent bike ride in my Queen Anne neighborhood, I quietly looked over Amgen’s stunning research and development facility — a beacon of global biomedical quality — and reflected upon the social contract between the company and taxpayers of our city, state and country and my role as chair of the state House's Finance Committee. And my disappointment, as USA Today noted, turned to frustration.
Immunex, an anchor of Seattle’s biotechnology and biomedical community from its founding in 1981, was acquired by a main industry rival, Amgen, in 2001. At the time of the deal worth approximately $16 billion in stock, Immunex had 1,500 employees, a number that was pared down to approximately 750 for the past decade. In addition to the direct employees, Immunex and Amgen generated substantial economic, social, financial and community value as an important part of our state’s civic life — and much good will. Amgen’s political relationships have been stellar and successful, the support for innovative community programs such as AmeriCorp’s City Year have been impressive, and its employees have made our city a better place to live. (Disclosure: I have received multiple campaign contributions from Amgen, served as a citizen co-founder of City Year, and am a shareholder in the company.)
Despite a well-established trend in Big Pharma (Pfizer, Sanofi, Novartis, etc.) that shows companies pulling back from R&D and retreating to primary research hubs, social and traditional media soon raised the question of whether state tax policy played a role in the company’s decision to leave Washington, casually alluding to an operating assumption that the state didn’t do enough to lower the tax burden on the company.
My personal and professional mission as Finance chair is to institutionalize a more rigorous level of analytical, financial and intellectual analysis of our state tax policy to match what we expect of state spending policies.
So let’s go beyond the headlines into the Amgen story and examine its relationship with state tax policy.
It’s not public information how much Amgen pays in various Washington taxes, although I seem to recall the company says in its federal Securities and Exchang Commission filing that it pays approximately 9 percent effective tax rate in total state taxes. What is public, however, is that the company has since 2004 been the third largest recipient of the high technology sales tax deferral program, a tax credit I have argued should be targeted primarily at small and early stage companies. For early stage and small companies, a modest tax reduction can have a major impact given that we tax on gross receipts, not net profits, and the dollars are usually directly invested in more engineers, scientists and researchers.
The company’s average benefit from the state tax break is $3.6 million per year, for a total of $28.5 million between 2004 and 2011. In 2013 the global earnings for Amgen were $18.7 billion, an 8 percent increase from 2012. The stock has recently been trading at all-time highs.
Did the $3.6 million annual tax benefit play a role in the company’s business decision to leave Washington?
Don’t kid yourself.
The company told me that Washington state tax policy in no way played any measurable role in this sweeping national business decision, which involved an overal 15 percent reduction in its work force.
And, of course, on the surface it’s patently ridiculous to consider that $3.6 million state tax benefit against revenues of $18.7 billion means anything substantial when you consider that: 1) Washington is strictly a R&D facility, so revenues are likely assigned, as with virtually all pharmaceutical companies, out of state or even the country, meaning that our tax rates are largely irrelevant to the firm. And, 2) Colorado has a generous high technology tax credit and yet the company closed its entire operations in that state, too.
It’s important to note that corporate taxes are paid in B&O, property, sales and excise taxes and each company is different. The list of companies claiming this benefit includes many well-known Washington state firms. The program is slated to end in January of next year since it was not renewed by the Legislature. For three years, I actively led discussions to renew the R&D tax program for small, early stage companies — those for example where $30,000 in tax reduction could help pay for another researcher — while asking large-scale global firms to contribute those tax dollars to higher education and the University of Washington to help produce more electrical, mechanical and industrial engineers. Those negotiations fell apart, although efforts are underway to rejuvenate aspects of the program.
Sometimes state tax policy plays a large role in business decisions and sometimes it’s completely irrelevant or secondary at best. But it’s too easy for pundits, lobbyists and elected officials to jump to unsubstantiated conclusions that the most important way to successfully recruit and retain great companies to the state is to lower or eliminate taxes when the data doesn’t support that position. It’s a tired, shallow argument that doesn’t stand up to analytical rigor, and it’s not based on data or reality.
The relationship between Amgen and Washington has been mutually beneficial and compelling. The people and company will be sorely missed. The Immunex and Amgen journey has been a testament to our city’s creative energy and spirit in the biotechnology and biomedical space, and our future is just as strong as before, but a little sadder with this loss.
The taxpayers of Washington directly subsidized Amgen’s R&D operations in the state through a minimum of the $28 million state tax exemption program, as well as the City of Seattle's contribution of $19 million in public infrastructure.
If it was a larger subsidy, would Amgen have stayed? If it was smaller, would the company have left the state earlier than 2014? Did the subsidy contribute to an intangible, positive business climate that made a difference? How can we know if we’re not in the private executive offices of the company? We can’t and, not surprisingly, the state tax program had no meaningful metrics or analytics from which to judge its success in creating jobs.
That’s why we should openly acknowledge that while small companies are often disproportionately impacted by tax policy, large multinational companies are rarely impacted by state tax policy in ways that drive their major national and global business decisions.
Arguing against this case is the Boeing story which, of course, can be debated at length; state tax policy may have indeed been a central criterion to their siting decision. In that case, nearly everyone blinked and wasn’t willing to take the risk of losing the 777X, 130,000 aerospace jobs and descendant airplanes to test the notion.
What should we do? Let’s stop pretending that state tax exemptions and benefits are central drivers of a vast majority of large-scale global business decisions — or at least let’s require disclosure of the data that would make the case for the tax benefits.
Let’s focus our policy efforts at the state level on ensuring Washington has a world-class education system from early learning through higher education, quality public infrastructure and quality of life that attracts and retains the best and brightest entrepreneurs and citizens.
And for what it’s worth, there is also an opportunity cost to the financial cost of tax exemptions. For $3.6 million a year we could have paid for each foster youth that graduates high school annually to attend the University of Washington.