For Recession Help, an IT Innovation Tax Credit?

A group of Silicon Valley veterans thinks this tax break could be the boost the industry needs. Now they hope to get Washington to agree

By Helen Walters

Venture capitalist Geoffrey Moore has no doubts about what puts the U.S. ahead of so many other lands. "The crown jewel in our economy," says Moore, author of management and innovation-themed books such as Dealing with Darwin: How Great Companies Innovate at Every Stage of Their Evolution, "is our ability to lead innovation."

It's a comforting image. But it also seems a touch out of date. Retail sales dropped 2.7% in the U.S. in December. The unemployment rate stands at 7.2%, with 3.6 million people tossed out of work in the past year. Home foreclosures jumped 81% in 2008. Clearly, President Barack Obama and his team have their work cut out to help the U.S. regain its glory.

That's why Moore, a partner at Mohr Davidow Ventures, and other Silicon Valley veterans, such as Genius.com Chief Executive David Thompson and Kevin Efrusy of Accel Partners, are pushing for an IT innovation tax credit. Their open letter, dated Jan. 7, was sent to then President-elect Barack Obama, Speaker of the House Nancy Pelosi, and other Washington pols. This temporary break—proposed for two years initially, with an option to extend it for four more years should an economic recovery prove elusive—would reward companies that invest in IT. Any business spending at least 80% of its 2008 annual IT budget would qualify for the 25% credit, providing an incentive for executives to keep buying both hardware and software.

"People talk about infrastructure, but then they build a bridge to nowhere," says Thompson, who had been chief marketing officer at Web-conferencing outfit WebEx before founding Genius.com, a B-to-B marketing site, in 2005. "Too often people don't take the next step to assess how [that infrastructure] actually helps you innovate, become more productive, and actually generate more revenue and get the economy going."

Maintaining Investments

Supporting investment in information technology is critical in order to raise productivity, argue Thompson and others. The tax incentive allows for some scaling back, but it would also offset the knee-jerk reaction by companies simply to retrench during the downturn. Thompson's thinking: Those who maintain their investments in IT will be primed for more aggressive growth when the economy recovers.

The catalyst for the letter came from Nobel Prize-winning economist Joseph Stiglitz, who has written extensively on the current financial crisis. In an Op Ed piece published in The New York Times in November 2008, Stiglitz wrote the benefits of such a credit would be "a high-powered, low-cost stimulus." Thompson, who describes Stiglitz as "a visionary naysayer," says the wisdom of the suggestion inspired him to take action, despite no experience of working in Washington.

That could prove a problem. Despite reassuring murmurs from Pelosi—the Democrat represents San Mateo, Calif., where Genius.com is based—the proposal hasn't yet captured the attention of lawmakers, and while Obama's team has earmarked $37 billion of the $825 billion stimulus plan for spending in high-tech areas, the tax break is absent from current versions of economic stimulus packages.

The Silicon Valley petitioners might also be accused of pushing breaks to line their own pockets. Most of the signatories are heavily involved in the technology industry.