The Rebirth of ZGZT….
I am one of the nine original members of a non profit, citizen space lobbying group called ProSpace. We started our journey in March of 1995, just after the revolution where the Republican party took over the House of Representatives for the first time in 40 years. I was a student at the time but those of us who started what was called “March Storm” had a strong desire, as a citizen group, to lobby our congressional representatives on matters concerning space that were important to us.
We did not go with our hands out, asking for money, like some space groups. We originally, though we did later, did not even advocate for specific projects, simply to get congress to recognize that space was more than NASA. Also, that by adopting intelligent policies, which were far easier to get passed in the congress, the commercial space industry, beyond the incumbent defense contractors, could contribute to economic growth, and thus increase the national tax base.
We had considerable successes, including the commercial space act of 1998, which has been used to help pry the cold dead fingers of the incumbents from the launch vehicle market in the U.S. We also had another idea that we pushed for several years which is what we called “Zero G, Zero Tax”. Zero G is a space term that is related to the fact that in orbit the gravity is effectively zero, or Zero Gravity, or Zero G. What this legislation sought to do is to help foster private enterprise in space, by providing for a tax holiday on the earnings (later capital gains as well) of companies who’s revenue (or a portion thereof) was derived from activities in space. This excluded existing industries like telecommunications and remote sensing.
We almost got it passed multiple times, but the conditions were not right at the time and the congress was wedded to what was called the “static” analysis of tax policy. The joint taxation committee in congress scored the bill as costing the treasury $10 billion dollars, which was absurd as at the time there were no companies that qualified for the exclusion! However, with that scoring, no matter its invalidity, this killed the bill. Today though, times have changed. We have a new congress, with a new majority, and today we have a still nascent but growing “New Space” industry. A Zero G Zero Tax bill today could be a very good means to encourage growth, spur investment, and create jobs, without costing the treasury any dollars, and indeed as we showed before with dynamic scoring, the net gain in taxes would be in the tens of billions of dollars.
So for today, I am putting our last White Paper from 2006 back out for consideration. In a follow on post a discussion will be had on how the passage of this bill, along with the growing nibbles of an appetite by investors, could result in an explosion of economic growth in space for American companies with the high paying jobs that will follow.
Reprint From Tuesday, November 14, 2006
White Paper on Zero Gravity – Zero Tax –
Congress has considered a bill intended to spur economic development of space-related American industries. Its potential for significant job creation, revenue generation and strengthening American leadership in space is analyzed herein, and recommendations presented to maximize its chances of success. The authors represent a non-profit group dedicated to a market-based approach to activities in space.
Manned spaceflight and space exploration has been primarily a government activity in the United States since its start in the early 1960s. As such, we Americans have not been able to take advantage of traditional market forces, private investment, cost savings due to competition, and improvements in safety, capability and methods that would normally fall out of a robust competitive marketplace. It is our goal as an organization to create a self-sustaining off-world economy. The vehicle to do so would be via the creation of a competitive marketplace for goods and services off planet. Should this goal be realized, we believe we can create a significant number of new jobs and increase revenues into the treasury as a result of those jobs. This White Paper explores possible changes in the tax code that could fuel the creation of new jobs, wealth and revenues in off-world businesses and industry.
- The History of Industrial Tax Credits and Tax Cuts
- 1862 – Pacific Railroad Act and Land Grant College Act – first significant legislation that gave something of value from the US government in return for activities that the government deemed important
- Succeeded in producing cross-country extension of railroads (several routes) and a series of colleges and universities nationwide (including former Agricultural and Mechanical colleges, mostly now renamed as State Universities)
- Same model was followed later in a series of Homestead Acts, which conveyed federal land to settlers in an effort to settle the West. This also worked nicely
- Several times in the last century, tax cuts have increased economic activity – usually in unexpected ways (volume of new money into the treasury significantly – and surprisingly, to some, increased)
- The first example of tax cuts creating economic activity last century was during the Coolidge administration in the mid-1920s. President Coolidge supported tax cuts which led directly to economic prosperity known as the Roaring ‘20s.
- President Kennedy proposed tax cuts late in his term of office. They were eventually passed as the Revenue Act of 1964. Increased economic activity and revenue growth provided the financial underpinning for Johnson’s Great Society
- The Reagan tax cuts of 1981 almost doubled the yearly dollar amount into the treasury by the end of his second term in office
- The capital gains tax cuts passed during the Clinton Administration in 1995 increased economic activity for the years to follow. They allowed congress to balance the federal budget late in that decade
- The Bush tax cuts of 2002-2004, which have increased the capital gains revenue into the treasury, unexpectedly cutting the projected deficit in half by FY 2006
- The use of tax credits to encourage investment in underdeveloped areas also has a long history (space is by definition an underdeveloped area) –
- Free ports (a.k.a. porto fraco, free zone, Foreign Trade Zone)
- Tax benefits usually limited to the elimination of tarrifs
- Hong Kong and Macao are classic examples
- Also exist in US, Bahrain, Iran, Japan, Malaysia, Philippines, Russia, Singapore, Croatia, Germany, Malta, Denmark, UK, Portugal, Georgia, Italy, Ireland, France, Latvia, Spain, Sweden, Finland, Ukraine, Bermuda, Panama, and Venezuela
- Free economic zones (not always distinguished from free ports)
- Partial or complete tax exemptions
- Exist in UK, United Arab Emirates, Russia, Belaurus, Ukraine, Hong Kong, Brazil, Chile, EU, Iran, US (Hawaii, Puerto Rico)
- Enterprise Zones (a.k.a. Urban Enterprise Zone, Special Economic Zone, Empowerment Zones, Enterprise Communities, EZs)
- Originated in England
- Popularized in US by Stuart Butler of the Heritage Foundation, Rep. Jack Kemp (R-NY) and Rep. Robert Garcia in the 1980s
- Used at both Federal and State level
- 1992 LA riots prompted more interest in Federal enterprise zones; track record considered mixed
- Bill Clinton signed Community Renewal Tax Relief Act in 2000; $15 billion in tax credits to private Community Development Entities
- Currently exist in US, China, India, Iran, Jordan, Poland, Kazakhstan, the Philippines and Russia.
- In US, investors often combine enterprise zone credits with Historic District tax credits; this has created a bias toward historical redevelopment rather than helping low-income areas that EZs were supposed to help. This has reduced the effectiveness of some EZ’s.
- Various tax holidays for industrial development
- Internet is best known example and most undeniably successful.
- Taiwan currently has five-year tax holiday for biotech and nanotech
- Israel offers biotech firms a 10-year tax holiday on undistributed profits
- India has tax holiday for IT in Software Development Parks until 2010; R&D tax holiday for up to 10 years
- The history of ZGZT (Zero Gravity, Zero Tax) Legislation –
- First introduced 2000. Provided for 20-year tax holiday for new space products and services. To attempt to maintain revenue neutrality, existing profitable industries were excluded; thus, the definition of eligible products and services excluded “any telecommunications service, any service provided by a weather or other earth observation satellite, and any service of transporting property to or from outer space.”
- Zero Gravity, Zero Tax Act of 2000
- HR 3898
- Cosponsored by: Rep Bartlett, Roscoe G. [MD-6] – 3/9/2000 Rep Calvert, Ken [CA-43] – 3/9/2000 Rep Cook, Merrill [UT-2] – 3/9/2000 Rep Gordon, Bart [TN-6] – 3/9/2000 Rep Hall, Ralph M. [TX-4] – 3/9/2000 Rep Jackson-Lee, Sheila [TX-18] – 3/9/2000 Rep Lucas, Frank D. [OK-6] – 3/9/2000 Rep Sensenbrenner, James, Jr. [WI-9] – 3/9/2000 Rep Weldon, Dave [FL-15] – 3/9/2000
- Reintroduced in 2001. Exclusions changed to “any telecommunications service provided from earth orbit, any service provided by a weather or other earth observation satellite, and any other service provided on or before the date of the enactment of this section of transporting property to or from outer space.”
- Zero Gravity, Zero Tax Act of 2001
- HR 2504
- Cosponsored by: Rep Calvert, Ken [CA-43] – 7/16/2001 Rep Harman, Jane [CA-36] – 7/16/2001
- Exclusion was the same as previous version
- Zero Gravity, Zero Tax Act of 2003
- HR 914
- Cosponsored by: Rep Calvert, Ken [CA-44] – 5/21/2003 Rep Harman, Jane [CA-36] – 5/21/2003 Rep Lucas, Frank D. [OK-3] – 5/21/2003 Rep Weldon, Dave [FL-15] – 5/21/2003
- Exclusion was the same as previous version
- 2005 version incorporates some tax-credit concepts from the former Calvert-Ortiz tax bill (i.e., Invest in Space Now Act). Can be seen as merger of two bills..
- Zero Gravity, Zero Tax Act of 2005
- HR 1024
- Cosponsored by:
- Rep Calvert, Ken [CA-44] – 3/1/2005 Rep Harman, Jane [CA-36] – 3/1/2005 Rep Lucas, Frank D. [OK-3] – 3/1/2005 Rep Weldon, Dave [FL-15] – 3/1/2005
- Exclusion was the same as previous version
- Why it failed before
- Inclusion of tax credits – which cost the treasury real money
- Failure to concentrate on the corporate tax holiday aspect of the legislation
- Failure to put it into perspective with other tax holidays for which Congressional support exists – both of which have bipartisan support:
- R&D tax credit
- NASA and “old-school” aerospace / DoD contractors ambivalent as it falls outside the bounds of normal government – contractor relationships
- Failure of the backers to work both sides of the aisle
- Failure to user dynamic scoring in analysis
- NASA will not support as this approach will be viewed by some as a way to seed competition for what it does
- Congresisonal perception that space is something that is necessarily expensive by virtue of being ‘space’ rather than due to historic lack of competitive marketplace for goods and services
- Scoring etc. for such bills
- Reported to be in the neighborhood of $10 billion – static analysis – cost to the treasury over 10 years
- The previous $10 billion scoring in lost revenue implies hundreds of billions of dollars in corporate revenue. As of today, there is zero revenue in this business segment today so there is zero existing cost to the treasury. Using a conservative 10% profit implies $280 billion in U.S. revenue subject to taxation ($28 billion profit yeilds $10 billion tax at the 35% rate). A conservative estimate is that 40% of that revenue is wages. Therefore the wages paid would potentially equal $112 billion. If we assume a conservative 20% federal tax rate for the taxes paid, this equals $22.4 billion dollars in federal tax revenue. Should the total number of jobs created be a conservative 1 million new jobs created, yearly salaries would yield an additional $17.47 billion dollars in social security and Medicare taxes paid into the Treasury. Add the two revenue streams, and the potential exists for an additional ~$40 billion dollars in total federal taxes for the 1 million jobs produced, a return to the Treasury in the neighborhood of four times the static analysis cost to the Treasury of this proposed legislation.
- Dynamic analysis includes personal income taxes and capital gains taxes paid by employees / investors – pays up to 5-10 times its cost in new revenue into the treasury via personal income taxes paid by employees
- Good and bad points of current proposals
- Key points of 2005 proposal –
- Excludes space-based income from gross income
- Space-manufactured goods and services are exempted from federal excise taxes, duties, tariffs and imposts
- Investment credit for qualified stock purchases
- Exclusion for capital gains from the sale of stock for corporations that do at least 90% of their work in space-related activities
- Good point – tax holidays have worked well in the past, significantly increasing economic activity and the flow of tax dollars into the treasury. Federal tax revenues come from employees and investors. There is no reason to believe they will not be similarly successful in the future.
- Bad point – 2005 proposal capped corporate gross receipts for qualifying corporations at $100 million / year. That number ought to be closer to $10 billion, given the startup costs, long lead times to run the regulatory gauntlet, and returns on investment needed to make space more attractive to investors
- Bad point – excluded telecommunication, weather & Earth observation activities from tax breaks. However, if the goal of this effort is to encourage the startup of new space businesses and industries, it is logical to exclude existing, profitable industries don’t need new incentives
- Bad point – 10-year phase out of provisions for stock purchase & capital gains starting in 2014. Normal lifespan for infrastructure – roads, buildings and equipment is typically 30 years. Some aircraft are flying that are approaching 50 years old. 30 years would seem to be an appropriate number in this regard based on the creation of new infrastructure on and off planet..
- Observation – current proposals exclude any activities done before bill was signed into law
- Bad point – can be painted as a taxpayer giveaway to well-connected members of Congress and potentially to existing aerospace companies. However, this is a generic complaint applicable to any targeted tax holiday, tax credit or deduction.
- Note that at this point, the single good point – the fact that it works, and has demonstrably worked well in the past – far outweighs all the bad points,
- Suggestions for improvement of current proposals.
- Concentrate on tax holidays rather than tax credits
- May have to sunset the tax holiday – if so, 30-50 years would be appropriate as that timeframe represents the useful investment lifetime of infrastructure, rather than the current proposal of a 20-year holiday
- Work both sides of the political aisle to ensure bipartisan support
- Find sponsors in the Administration and on Capitol Hill that are willing to push this thru Congress
- Treat this as jobs and economic growth legislation rather than a revenue legislation
- When doing economic markup, emphasize the immediate increase in personal income taxes paid by people in new, potentially high paying jobs as a result of this tax holiday on investment and corporate income taxes with the deferred nature of revenue increase due to tax holiday for corporate income taxes and space-related investments
- Potential Foundation actions for the future to make ZGZT happen
- Change the name to something other than that of previous legislation. One suggestion would be the “Jobs and Economic Growth Act of 2007”
- Work both sides of the political aisle
- Sell it as a jobs creation and revenue growth program
- Parallel it with tax breaks in capital gains in the 1980s, 1990s, 2000s, and tax holidays for the Internet – all which have successfully brought in significantly more money to the treasury via personal income taxes paid by new employees and have grown the economy
- Possibly float it in the lame duck session of Congress in November–December of this year
- Prep it for Congressional action in 2007
- Prep it for advocacy during March Storm in 2007
- Set up a session in next year’s conference on tax policy and invite several well-respected free-market, pro-growth economists to speak on the subject
- Actual text of 2005 Legislation follows:
To amend the Internal Revenue Code of 1986 to provide tax incentives for investing in companies involved in space-related activities.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the `Zero Gravity, Zero Tax Act of 2005′.
SEC. 2. EXCLUSION OF SPACE-RELATED INCOME FROM GROSS INCOME.
(a) In General- Part III of subchapter B of chapter 1 of the Internal Revenue Code of 1986 (relating to items specifically excluded from gross income) is amended by inserting after section 139A the following new section:
SEC. 139B. SPACE-RELATED INCOME.
`(a) General Rule- Gross income shall not include space-related income.
`(b) Space-Related Income-
(1) IN GENERAL- For purposes of this section, the term `space-related income’ means–
(A) income derived from the sale by the taxpayer to an unrelated person of–
(i) any product or article which is produced by the taxpayer in outer space, and
(ii) any service provided by the taxpayer in or from outer space,
(B) income of an individual attributable to services performed in or from outer space by such individual in a trade or business, and
(C) any amount not described in subparagraph (A) or (B) which is interest, rent, royalty, or similar amount received with respect to production or service described in subparagraph (A) or (B).
(2) EXCEPTION FOR TELECOMMUNICATIONS SERVICES, ETC- Paragraph (1)(A)(ii) shall not apply to–
(A) any telecommunications service provided from earth orbit,
(B) any service provided by a weather or other earth observation satellite, and
(C) any other service provided on or before the date of the enactment of this section of transporting property to or from outer space.
(3) EXCEPTION FOR WAGES- Paragraph (1) shall not apply to wages (as defined in section 3401) received by any employee of an employer.
(4) PROPORTIONAL ALLOCATION BETWEEN SPACE-BASED AND EARTH-BASED ACTIVITIES- In the case of any product or article which is produced partly in space, space-related income shall be an amount which bears the same ratio to the amount of gross income attributable to the sale of such product or article as the expenses attributable to producing such product or article in space bears to the total expenses incurred in producing such product or article.
(5) PRODUCED- For purposes of this section, the term `produced’ includes created, fabricated, developed, grown, manufactured, extracted, processed, cured, and aged.
(c) Exclusion From Tariffs, Etc- Any product–
(1) which is manufactured in outer space, and
(2) which was–
(A) launched from, and returned to Earth, within the United States, or
(B) Manufactured at a facility in outer space which is owned by 1 or more United States persons, shall be exempt from all Federal excises, imposts, and duties and any other Federal tariffs.
(d) Phaseout of Benefits- In the case of a taxable year beginning after December 31, 2014, the amount excluded under subsection (a) shall be reduced (but not below zero) by x/10th’s of the amount excludable without regard to this subsection, where `x’ is the number of years such taxable year is after the last taxable year beginning before January 1, 2015. A similar rule shall apply to the benefits under subsection (c).’.
(b) Clerical Amendment- The table of sections for part III of subchapter B of chapter 1 of such Code is amended by inserting after the item relating to section 139A the following new item:
`Sec. 139B. Space-related income.’.
(c) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2005.
SEC. 3. CREDIT FOR PURCHASE OF QUALIFIED SPACE COMPANY STOCK.
(a) In General- Subpart D of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 (relating to business related credits) is amended by adding at the end the following new section:
SEC. 45J. SPACE COMPANY INVESTMENT CREDIT.
(a) General Rule- For purposes of section 38, the space company investment credit determined under this section for any taxable year is the amount paid in the taxable year for the purchase of qualified stock in a qualified space company.
(b) Qualified Space Company- For purposes of this section–
(1) IN GENERAL- The term `qualified space company’ means a domestic C corporation if for the 3-taxable-year period ending with the taxable year immediately preceding the taxable year in which qualified stock is purchased–
(A) the average annual gross receipts of such entity does not exceed $100,000,000, and
(B) more than 70 percent of such gross receipts are derived from space-based business.
(2) SPACE-BASED BUSINESS- The term `space-based business’ means a business whose gross receipts are substantially space-related income, as defined in section 139B(b).
(3) AGGREGATION RULES- Rules similar to the rules of section 1202(d)(3) shall apply.
(c) Qualified Stock- For purposes of this section–
(1) IN GENERAL- Except as otherwise provided in this section, the term `qualified stock’ means any stock in a domestic C corporation if–
(A) as of the date of issuance of such stock, such corporation is a qualified space company, and
(B) except as provided in subsections (f) and (h), such stock is acquired by the taxpayer at its original issue (directly or through an underwriter)–
(i) in exchange for money or other property (not including stock), or
(ii) as compensation for services provided to such corporation (other than services performed as an underwriter of such stock).
(2) ACTIVE BUSINESS REQUIREMENT- Stock in a corporation shall not be treated as qualified stock unless, during substantially all of the taxpayer’s holding period for such stock–
(A) such corporation meets active business requirements substantially similar to the requirements of section 1202(e), determined on the basis that the qualified trade or business is a space-based business, and
(B) such corporation is a C corporation.
(3) CERTAIN PURCHASE BY CORPORATION OF ITS OWN STOCK- Rules similar to the rules of section 1202(c)(3) shall apply.
(e) Recapture- If, during any taxable year ending with or within the 10-year period beginning on the date qualified stock was purchased by the taxpayer, the issuer of such stock ceases to a qualified space company, the tax under this chapter for such taxable year shall be increased by the aggregate decrease in the credits allowed under section 38 for all prior taxable years which would have resulted solely from reducing to zero any credit determined under subsection (a) with respect to such stock.
(f) Termination- This section shall not apply to stock acquired after December 31, 2013.’.
(b) Credit Allowed as Part of General Business Credit- Section 38(b) of such Code (defining current year business credit) is amended by striking `plus’ at the end of paragraph (18), by striking the period at the end of paragraph (19) and inserting `, plus’, and by adding at the end the following new paragraph:
(20) space company investment credit determined under section 45I(a).’.
(c) Conforming Amendments-
(1) Subsection (c) of section 196 of such Code is amended by striking `and’ at the end of paragraph (11), by striking the period at the end of paragraph (12) and inserting `, and’, and by adding at the end the following new paragraph:
(13) the space company investment credit determined under section 45I(a).’.
(2) The table of sections for subpart D of part IV of subchapter A of chapter 1 of such Code is amended by adding at the end the following new item:
Sec. 45J. Space Company Investment Credit.’.
(d) Effective Date- The amendments made by this section shall apply to costs paid or incurred in taxable years beginning after December 31, 2005.
SEC. 4. CAPITAL GAINS EXCLUSION.
(a) In General- Part I of subchapter P of the Internal Revenue Code of 1986 (relating to treatment of capital gains) is amended by adding at the end the following new section:
SEC. 1203. EXCLUSION FOR GAINS FROM SALE OR EXCHANGE OF STOCK OF QUALIFIED SPACE CORPORATIONS.
(a) In General- Gross income shall not include gain on the sale or exchange of any stock of a qualified space corporation.
(b) Qualified Space Corporation- For purposes of subsection (a), the term `qualified space corporation’ means, with respect to any taxable year, a domestic corporation which is a C corporation if–
(1) such corporation is organized exclusively for providing to unrelated persons–
(A) any product or article which is produced (within the meaning of section 139B(b)(5)) by the corporation in outer space, or
(B) any service provided by the corporation in or from outer space, and
(2) At least 90 percent of the expenses of such corporation are attributable to the active conduct of a trade or business of providing a product, article, or service described in paragraph (1).
Such term shall not include a corporation providing a service, product, or article described in section 139B(b)(2).’.
(b) Clerical Amendment- The table of sections for part I of subchapter P of such Code is amended by adding at the end the following new item:
Sec. 1203. Exclusion for gains from sale or exchange of stock of qualified space corporations.’.
(c) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2005.