By: Lisa R. Weidman
How do businesses choose which state to set up shop? According to Penn State Berks Associate Professor of Business and Economics Lolita Paff, state-level research and development tax credits affect this monumental decision, which in turn greatly affects each state’s economic condition.
Paff is so well respected for her research on state-level R&D tax credits that in 2004, she was invited to give testimony to the Pennsylvania Senate Finance Committee. The committee was holding hearings to decide if they should increase the state’s R&D tax credit.
She subsequently published a paper in 2006 entitled “Pennsylvania’s R&D Tax Credit: Does Reality Match the Rhetoric?” While specific dollars were being earmarked for small businesses, if not enough took advantage of these dollars, the bulk went back to large firms.
“My finding was that to a certain extent, the reality doesn’t match the rhetoric,” explains Paff. “I suspect that firms that would have conducted R&D in our state anyway got paid for it regardless, because the vast majority of the dollars went back to very large pharmaceuticals.”
“There are good aspects to the Pennsylvania policy; it’s just that tax credits tend to be the vehicle that states use because they’re pro-business, but really it’s sort of a broad-brush approach, where a more fine-tuned but harder-to-implement policy would be better.”
“The Department of Community and Economic Development (DCED) runs lots of different incentive programs and they work with firms more directly. They provide a really valuable service because they set benchmarks that firms must meet in order to continue receiving funding. But these types of programs are very labor- and cost-intensive, so most states utilize R&D tax credit incentives, which are much more straightforward to implement.”
When asked if she plans to continue her studies on Pennsylvania’s R&D tax credits, Paff states that she would like to revisit the topic and look at it longitudinally.
Paff began her study of R&D tax credits as a graduate student when she came across a letter to the editor in the Wall Street Journal in which an industry group complained that it could not compete in Texas because the state did not offer R&D tax credits. The statement intrigued Paff and she has spent a decade studying the subject of R&D tax credits on the state level.
Paff has a unique background that combines experience in two divergent fields: industry experience as an accountant and academic training in economics. This unique combination of skills and analytical thinking has enabled Paff to conduct research from a different perspective than most economists.
She has published several papers on different aspects of R&D tax credits, and she focused on California’s Silicon Valley and Massachusetts’ 128 Corridor because, as she explained, other states would love to replicate what they have established. In particular, Paff focused on the fields of software development and biotechnology in these states.
Paff mentions that from 1994–1999, California was constantly changing their R&D policy, whereas Massachusetts made no changes to their policy. What she wanted to determine was whether the increases California made to their R&D tax credit rates made a difference to industry research spending, and they did. Basically one dollar of forgone tax revenue generated about one dollar of increased R&D spending.
She adds that her studies focus on state-level policy and concentrate on micro-level data, using the financial statements of firms, rather than macro-level data that uses national or international comparisons of gross R&D spending or spending across industry categories. She adds that hers is the only study to use micro-level data that she is aware of, other than a study conducted by Roseanne Altshuler in 1988, who worked for the IRS at the time and had access to tax data.
The data-gathering process was extremely tedious because Paff analyzed six years of data for 130 firms. She used a database from Wharton Research Data Service called Compustat, narrowing the sample down to firms that only did R&D in the state of California or the state of Massachusetts. This was done by examining at least six 10-K filings for each firm; the data gathering process took nearly a year to complete.
Originally planning to study music, Paff chose an undergraduate institution based on its music program. However, she soon found that she did not like being a “little fish in a big pond,” and changed her major to accounting. She earned her CPA certification and quickly went to work as an auditor and then as an accounting supervisor in the private sector.
When she became a mother, Paff was not happy with working twelve-hour days and said she was fortunate to have the opportunity to be a stay-at-home mom for awhile. But soon she found that she wanted to do more, and she heard that the local community college was hiring. While her CPA certification opened the door for her to teach at night, she realized that if she wanted to advance in this career path, she would need to earn at least a master’s degree, so she enrolled in Seton Hall University’s MBA program.
In the meantime, she learned of a faculty position at another local college, and she was awarded the position with the condition that she would earn her MBA and pursue her Ph.D. After graduating from Seton Hall, she was accepted at Lehigh University and earned her Ph.D. in Business and Economics.
“Lehigh’s program gave me the necessary research foundation and skills while fostering my development as a teacher, ” comments Paff. “They have a good reputation for producing teacher/scholars.”
Paff joined Penn State Berks in 2001 as Assistant Professor of Business and Economics and has risen through the ranks to her current position as Associate Professor of Business and Economics and Coordinator of the Business program.
She adds that since she has accepted the role of program coordinator, her research emphasis has shifted toward looking at teaching related research, such as the outcomes of the college’s internship program, and she is hoping to publish some of that work.
“My heart is really in the teaching and learning research at this point,” comments Paff. She is also planning to use her administrative duties as a launching platform for research related to program assessment.
“My administrative duties are significant because the Business program is fairly large. I spend a lot of time advising students and working with students in our internship course.”
“Overall, our students are very well received. That’s evidenced by repeat Penn State Berks internships with the same employers semester after semester, and the significant number of students who get hired by firms that create a position for the intern because they don’t want to let him or her go.”
In addition to her research on teaching and learning at Penn State Berks, Paff has done consulting work with several local school districts on their business curriculum. She is helping these schools to revamp their curriculum, determine which courses should be honors courses, and prepare their students for college.
In fact, Paff was awarded the college’s 2011 Outstanding Service Award, in part for her work with local school districts to enhance their business curricula, among other community service activities.
So what’s next for Paff? At the time this article was written, she was headed to Duy Tan University in Vietnam. Part one of her assignment is to teach microeconomics content and teaching strategies to Vietnamese faculty. The second stage of the collaboration is team-teaching financial accounting to Vietnamese students as part of a faculty development partnership between the two universities.