R&D Tax Credit - Let's Make it Permanent
Dr. Dana Durham, V.P. Technology for Syrgis comments that once again Congress is debating extending the R&D Tax Credit for corporations. Once again? Created in 1981 to boost R&D spending, the Research and Experimentation Credit has always been a temporary measure and has been extended 14 times over its life. President Obama signed the latest extension authorization in December 2010. This extension, too, will expire December 31, 2011. The current debate is centered around doing away with the credit entirely in lieu of a reduced corporate tax rate from 35% to perhaps as low as 25%. As appealing as that sounds, I believe this is a poor choice.
Some companies are in apparent support of the elimination of the credit to garner a lower rate. (http://articles.latimes.com/2011/jun/03/business/la-fi-corporate-tax-rat...). But clearly part of the appeal to eliminate the credit is the desire to remove the uncertainty of its application. Planning has been and currently must be based on an assumption Congress will resurrect the credit. Further, the calculation of the credit is onerous (see the Dept. of Treasury report for details) and adds unwanted complexity to business reporting.
Despite its shortcomings, the credit does work. Recent studies (http://www.treasury.gov/resource-center/tax-policy/Documents/Research%20...) have shown that the Research and Experimentation Credit generates a dollar for dollar increase in R&D expenditures in the US. These are not inconsequential expenditures. According to the Department of the Treasury, in 2008 (the last year of available data), 42.6% of all tax returns claiming the credit were from the Manufacturing sector. These returns claimed $5.76B (69% of total) of credit. The chemical industry claimed $1.49B credit (17.9% of the total).
So what’s the big deal? After 30 years in the chemical industry, I know that R&D spending is highly scrutinized (rightly so, but that’s a different story!) and one of the first things to be cut in poor economic times. My fear is that, even in good times, little of the cut in corporate tax will be applied to R&D but rather to the bottom line to improve shareholder value. The US is already slipping in R&D intensity. In 2009, the US ranked 24th of 38 in the OECD’s measures of industrial tax incentives. Also, in 2009 21 OECD countries offered R&D incentives versus only 12 in 1996. Finally, the US share of global R&D spending was 33% in 2007 versus 39% in 1999, while over the same period China’s share increased fourfold. Global competition is heating up and the US in NOT keeping up.
Get involved. Work with your trade groups and SOCMA to encourage your Representatives to amend and make permanent the R&D tax credit!
