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From Ad Astra, Volume 19 Number 1, Spring 2007

Zero G, Zero Tax

Enabling Private Space Enterprise Through Tax Incentives

By Dennis Wingo

Money! Money is the true rocket fuel of the commercial Space Age. There is a quote in the movie The Right Stuff that one of the astronauts getting ready for the Mercury mission says: "No bucks, no Buck Rogers!" This statement has become an axiom in both government and commercial space. No bucks killed the Apollo program when the money was shifted away from space in the early 1970s. The space shuttle's development was constrained by money, and the vehicle we have today is the result. The space station? Same story. How about the first Space Exploration Initiative under President George H.W. Bush? No bucks, no lunar base! These are the facts of life regarding space.

With the Congress telling NASA it must live with the same budget that they had last year, the first ominous clouds of future lack of congressional interest in the Vision for Space Exploration are on the horizon. If this is the case, then what can be done by our community to support private space efforts?

Since the dawn of the Space Age, there has been very little movement toward private markets for human spaceflight. NASA has always been the 900-pound gorilla in that market, and the perception has always been to avoid the market like the plague by the investment world. It took the risk capital from Paul Allen, who funded the technically brilliant Burt Rutan, to build the first prototype of a mass-market suborbital space tourism system. However, Allen probably would not have invested had there not been some form of return in the form of the Ansari X Prize. Allen is what we in the space business call a visionary investor, or VI. A VI, while looking for an economic return, does have an agenda beyond pure return on investment. Yet the vast majority of the risk capital out there sees human-related space as too great of a risk, with too little return to invite their participation.

We cannot tell today what will be the "killer app" of the commercial Space Age. However, we do know what works to enable the growth of new industries. There is a long history of this in the development of America as a capitalist society. It was a mixture of a granted state monopoly and private investment that enabled Robert Fulton to build the world's first practical steamship. It was a mixture of government bonds and private investment by names like Stanford, Huntington and Crocker that enabled the nation to be united by the transcontinental railroad.

In 2000 the first serious effort to address this issue was undertaken with the introduction of the Zero G, Zero Tax (ZGZT) legislation. Here is a short history of the legislation provided by Alex Gimarc as part of a white paper on the subject:

  • First introduced in 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."

  • 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."

  • The 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.

The ZGZT legislation has had many sponsors and actually almost passed in the House of Representatives in 2001. The bill failed because the congressional budget office examined the tax consequences of the bill at $10 billion over its 20-year life. This was not examined for its positive aspects. Today there is zero revenue by any company that would be covered under the ZGZT legislation. In order to cost the government $10 billion, the companies have to make a profit of $28.57 billion over that time period (assuming the standard 35% corporate tax rate). If we use a conservative 10% profit margin for these companies, this implies that the aggregate revenue over the 20-year period is $285.7 billion!

Let's take this a little further. It is typical for companies in the high-tech engineering world to have a cost of labor of 30-50% of revenue. This means that the salaries for all of the people who work for the ZGZT-enabled companies are between $86 billion and $143 billion. Most of these folks have mid- to high-paying jobs, meaning that we can take a conservative 18% of their salaries for federal taxes and 15.3% for social security and Medicare taxes. This brings a total tax revenue into the federal treasury as follows:

Table 1: Salaries as a Percentage of Total Revenue and the Resulting Tax Consequences
 
Salaries
(Billions)
Fed Taxes (18%)
(Billions)
SS & Medicare
(Billions)
Total Taxes
(Billions)
30% Revenue $86.71 $15.43 $13.31 $28.54
40% Revenue $114.28 $20.57 $17.48 $38.05
50% Revenue $142.85 $25.71 $21.85 $47.57

What the table above clearly shows is that even using very conservative numbers for salaries as a percentage of revenue and taxes as a percentage of salaries, the net gain to the federal treasury is between $18 billion and $37 billion over the life of the bill. This is pretty good for an industry that did not exist before the passage (potential) of the bill. This is called dynamic scoring in congressional legal terms, something that Congress did not do when they considered the ZGZT bill previously. It is this type of argument that has to be made for Congress to really understand how this bill enables space commerce.

What about the investor? The investment community well understands the effect of tax policy on the growth of industry. The tax holiday on the Internet was one of the crucial factors enabling its growth from a few hundred academic computers in the 1980s to the global force that it is today. This is also the potential for space. We as space advocates know the value of opening the solar system for economic development. We have not done a good job over the years in communicating this vision. We have an opportunity with ZGZT and similar legislation to let dollars speak for us with the result that Buck Rogers takes on a whole new meaning!

Dennis Wingo is CEO of the Huntsville, Alabama-based Skycorp Inc. and the author of the book Moonrush.


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