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Biotech tax credit faces demise amid talk of special session

ANNAPOLIS — A Rockville-based biotechnology company spent the last year trying to kill off bacteria that cause stomach ulcers, the kind of research that would be difficult to conduct without significant outside investment.

Gov. Martin O’Malley greets Senate President Thomas V. Mike Miller, Jr. at Tuesday’s bill-signing ceremony as House Speaker Michael E. Busch looks on.

But by passing a “doomsday” budget containing $500 million in spending cuts, the Maryland General Assembly could instead kill off Sequella Inc.’s research before it develops a drug to kill off the bacteria.

A popular tax credit used mostly by small biotechnology companies was among the items placed on the legislative chopping block when the General Assembly failed to pass a pair of revenue bills before time expired Monday night.

Gov. Martin O’Malley could call a special legislative session to raise revenues before cuts go into effect July 1. The presiding officers of the Senate and House of Delegates could also call a special session without an executive order from O’Malley if a majority of senators and delegates approves such a session.

The cuts include substantial reductions in elementary and secondary and higher education funding — totaling more than $100 million — and the elimination of 500 state jobs.

A pair of revenue bills, one that would have raised the income tax rate for people making more than $100,000 a year and another that shifted the cost of teacher’s pension to local jurisdictions, forced the deep budget cuts.

Cutting the biotechnology investment tax credit saves the state $8 million in the short term. But Marty Zug, Sequella’s chief financial officer, said the cut costs the state in the long term.

Investment is hard to come by for small biotechnology companies, Zug said. The credit, as much as $250,000 per investor, offered some incentive for individuals to put money into biotech firms.

“It stops the ability to do studies” at small biotech companies, with fewer than 25 employees, Zug said.

“This is the most important statewide program for biotechs of that size,” Zug said. “While it’s not a catastrophe across the industry, small biotechs need [the credit] to get to that next level.”

Christian S. Johansson, secretary of the state Department of Business and Economic Development, said the tax credit “has been a key part of our strategy to encourage investment.”

He said one-third of all Maryland jobs created from 2002 to 2010 were in the life sciences industry.

“It’s something that has allowed us to attract tens of millions of dollars in investment into Maryland companies that may not have occurred otherwise,” Johansson said. “We would very much, obviously, like to see that continue.”

Johansson would not say whether he thought a special session ought to be called. But he was disappointed the legislature enacted a budget that cuts the biotech credits.

“Clearly this is a part of the governor’s key priorities in his economic development strategies, but the governor didn’t choose this path,” Johansson said. “As investors look at opportunities, there may be a lot of young companies that would have attracted investments otherwise, that were counting on this tax credit to push that investment across the finish line, [and now] it may not be available. That’s a shame.

“The governor was very clear in his budget this was a priority. … We are where we are right now. … Biotechnology is very risk, but it has huge rewards.

“This is an area we have a lot of potential in.”

The biotechnology tax credit, one of the eight costliest credits offered by the state, was slated for review in 2017 through legislation passed this session. The credit could have been eliminated after that review if a legislative panel decided it was ineffective.

While many state tax breaks are not reviewed, DBED monitors the effectiveness of the biotechnology tax credit.

Senate President Thomas V. Mike Miller, Jr., D-Calvert and Prince George’s, has said publicly that he would like a special session to be convened, but House Speaker Michael E. Busch, D-Anne Arundel, has not.

While a special session could theoretically be commissioned at any time, O’Malley, Miller and Busch appeared content at a tense bill signing Tuesday to first allow each party time to cool off.

After dozens of bills were signed by the trio, Miller appeared confident that a special session would be called in time to prevent the “doomsday” cuts from going into place.

“It’ll be fine, I promise,” Miller said. “We ran out of time, that’s all.”

Miller said part of the reason a revenue package was not approved was because both chambers had budget plans that were substantially different than the budget offered by O’Malley at the start of the session.

“We set our agenda. … We walked away from the governor’s plan, and so the House had its own budget plan, and the Senate had its own budget plan, and we didn’t have the guiding force in between to pull us together. The House and Senate were apart until the last day of the session.”

Zug, the biotech CFO, thought the state would work through its issues and restore both the tax credit and other cuts to programs and services. He said a loose coalition of biotechnology leaders would be lobbying elected officials to encourage a special session.

“I really hope, and I believe, they’re going to get this ironed out,” Zug said. “If they don’t, it would have a devastating effect on small biotechs in the state that have used the tax credit to raise money.

“I think it’s very apparent that, number one, you need a special session, because there are other problems with the ‘doomsday’ budget that are much bigger than this one.”