Could UTC-Raytheon merger, Iowa R&D tax credit bolster innovations at Collins Aerospace?

Research and development at Collins Aerospace could be on track to grow in Iowa, with its parent company poised to invest billions into innovation in the coming years.

Since June 9, when United Technologies Corp. and Raytheon Co. announced their agreement to merge into Raytheon Technologies Corp., company executives have touted a planned $8 billion annual R&D budget as one of their foremost selling points for the deal.

That figure supplements the $15 billion sum UTC said last May it would invest in R&D and capacity expansion in the United States over the next five years, thanks to the Tax Cuts and Jobs Act of 2017.

Of that total, $9 billion was earmarked for initiatives including artificial intelligence, cybersecurity and high-temperature materials, with the remaining $6 billion slated for increasing capacity and improving efficiency at existing manufacturing facilities.

What will future R&D look like?

It's not clear how large a slice of the new R&D pie would go to Collins Aerospace operations in Cedar Rapids. But hopefully, said Debi Durham, director of the Iowa Economic Development Authority, some of those allocations will lead to additional research at the new company's in-state facilities.

'We would certainly want to compete for that additional R&D dollar spend,” she told The Gazette in a Tuesday phone call.

Durham said her department continues to stay in touch with Collins Aerospace representatives as the proposed merger progresses, in part to 'let them know we appreciate their investment in our state,” though the talks have been of a more general, preliminary nature.

In 2017, Rockwell Collins and UTC Aerospace Systems - which were combined in late 2018 to compose Collins Aerospace - together invested more than $3.1 billion in R&D globally, Collins Aerospace spokeswoman Pam Tvrdy-Cleary said.

Rockwell Collins invested approximately $1 billion annually in R&D, with the majority of that work taking place in Iowa, she said.

UTC's most recent quarterly report, filed with the U.S. Securities and Exchange Commission on July 26, reflects a 42 percent, or $764 million, increase in total company- and consumer-funded R&D in the first half of 2019 compared to the same period in 2018. That amounts to a total six-month expenditure of $2.6 billion.

The primary driver of the increase was UTC's acquisition of Rockwell Collins, with the majority of the company-funded expenses incurred by UTC's aerospace businesses, the filing says.

Also uncertain is exactly how many new jobs any potential new research and development in Iowa could create.

Tvrdy-Cleary said the company currently has more than 400 new positions open in Iowa, including R&D-based jobs in engineering and technology, and with more than 90 percent of the openings for engineers.

'These direct R&D-related jobs have a payroll of more than $400 million annually,” she said. 'These employees pay taxes, buy goods and services here, and help support many other jobs.”

More than 10,000 of Collins Aerospace's approximately 73,300 employees now work in Cedar Rapids, Coralville, Decorah, Bellevue and Manchester. The merged Raytheon Technologies Corp. is projected to employ around 180,000 people worldwide, and Raytheon's CEO has said over 70,000 additional jobs will be provided over the five years following the merger.

Focuses for research and development at Collins' Avionics and Mission Systems business units based in Cedar Rapids include connectivity solutions on and off the aircraft, intelligent systems for manned and unmanned aircraft and the connected battlespace.

Tvrdy-Cleary said Iowa-based R&D so far has gotten the ball rolling on technologies including synthetic and enhanced vision systems for pilots in low or no-visibility situations, touch screens for primary flight displays and Live Virtual Constructive training for the military.

Further R&D optimization could result from UTC and Raytheon businesses with overlap, which account for just more than $12 billion, or about 31 percent of the combined company's expected 2019 defense revenue of $40 billion, according to a Jefferies Insights report provided by a UTC spokeswoman.

This is expected to support research opportunities into other products such as directed energy weapons, hypersonic missiles, ISR and cybersecurity for connected aircraft, the report says.

What difference could Iowa's tax credit for in-state R&D make?

One factor that could make a difference in determining where Raytheon Technologies Corp. bases future research is Iowa's Research Activities tax credit, the top claimant for which historically has been Rockwell Collins.

Eligible companies earn the tax credit for 6.5 percent of qualifying Iowa research, above whichever is larger between 50 percent of the year's qualifying research or a fixed base amount.

The businesses also can pick up supplemental research activities credits through the state's High Quality Jobs program, up to an additional 10 percent if their annual gross revenues are under $20 million and an extra 3 percent if they're above that amount.

In 2018, Rockwell Collins made claims for around $13.8 million in the Research Activities credit in 2018 - the most for any entity - and nearly one-fifth of the total $70 million in claims statewide.

The next two closest companies, Deere and Co. and DuPont, made claims for about $4.8 million apiece.

Rockwell Collins also was the largest claimant in the tax credit since 2010, making claims for a total $117.9 million during those nine years, ahead of Deere at $87.5 million and DuPont at $57.7 million.

Though Iowa's Department of Revenue does not report how much each company received in refunds - or checks qualifying companies and individuals with no state income tax liability receive from the state - the state paid $46.1 million to 1,821 taxpaying individuals and businesses in 2018. Some $41.8 million of that went to 239 companies.

Durham said the Research Activities tax credit is one of the state's 'most effective” and 'most sought-after,” in large part due to its refunds - a facet unique to Iowa, Minnesota and Nebraska among the 36 states that offer some form of R&D credit.

'The R&D tax credit is one of those proactive incentives because, one, those are some of the highest paid jobs in the economy, and two, (companies) tend to do their manufacturing and processing where they're doing their R&D,” Durham said.

The credit also helps make in-state research less financially risky for businesses, and is a more consistent form of support compared to federal research credits, which can come with intermittent expiration dates and reinstatement periods, Iowa economic development officials wrote in a 2018 information sheet.

'Technology innovation fuels our future growth and is what will differentiate our company in tomorrow's highly competitive global marketplace,” said Tom Stanczyk, then-vice president of tax for Rockwell Collins, in the sheet.

'The refundability of the research-and-development tax credit is a significant stimulus for further economic development that encourages the retention and development of high quality jobs.”

Spokeswoman Tvrdy-Cleary said Collins Aerospace's research positions are supported by the R&D tax credit.

'The R&D tax credit, in its current form, is a key factor in Collins' decision/ability to maintain a strong engineering presence in the region and hire a high-tech workforce that develops transformational technologies for our commercial and defense customers around the world,” she said.

Changes recommended

Over the years, some have advocated modifications to the Research Activities tax credit.

Peter Fisher, research director at the Iowa Policy Project, said the credit originally was designed to stimulate R&D at smaller companies and start-ups. But now large, profitable companies receive the lion's share of credits through refunds.

Fisher cited a 2010 report from a state Tax Credit Review Panel, whose members recommended changes to the R&D credit by way of eliminating refundability for companies with yearly gross receipts over $20 million, plus a sunset clause, so lawmakers could review and consider adjusting the program every five years before reauthorizing it.

The review panel described Iowa's credits program as 'one of the most generous in the nation.”

The recommended changes, Fisher said, could free up funds in Iowa's General Fund that could go toward other priorities beneficial to companies such as Collins Aerospace, including funding for public education and universities.

'They (Collins) are consumers of educated labor and we need a good education system to not just train their workforce but attract scientists and engineers who want to live in Iowa,” Fisher said. 'They (state lawmakers) keep shortchanging education while these $200 million to $300 million tax credits keep going on without any examination, and I think that's a problem.”

Durham said her department has solicited research of Iowa's incentives, including in comparison to other states, and that potential changes to the R&D credit should be 'open to discussion.”

'There are things we probably could do differently,” she said.

Those could include reevaluating coupling eligibility for Iowa's R&D credit with its federal counterpart or focusing on industry sectors with the greatest opportunities to scale jobs and wealth, though of some current mechanics, including the refundability, she added, 'leaving it where it is is also important.”

Fisher said it's 'hard to say” whether Iowa's tax incentives will be influential in terms of where Collins Aerospace bases new research, though he's skeptical they will rank ahead of other factors such as workforce quality, wages and access to market.

'The corporations hold all the cards, which is why I think states and localities routinely spend way more than they need to,” Fisher said. 'It's like playing poker where the other players know your hand but you don't know theirs.”

' Comments: (319) 398-8366; thomas.friestad@thegazette.com