In their last-minute rush to adjourn in November, US lawmakers enacted tax legislation of great interest to the laser industry and other high-tech sectors: a tax credit based on a company's expenditures on research and development (R&D). An existing tax credit for R&D expired on June 30, 1999. Some proponents had hoped to write the tax credit permanently into law, but the final result was the next best thing: a relatively long extension of the credit (at least in the way that Washington looks at things), for five years, through June 30, 2004.
The extension of the R&D tax credit was included as part of a package of extensions of various tax credits, covering, for example, refundable tax credits, such as one for child-care expenses, the tax deductibility of educational expenses paid for an employee by an employer, and a tax credit for employers who hire former welfare recipients. But the R&D tax credit was, by far, the priciest of the tax provisions in the bill. The congressional Joint Committee on Taxation estimates that renewing the R&D tax credit will cost the government $10.5 billion in lost income through 2004.
Under the law that expired in June, a company could take a tax credit of 20% of the amount that it spent on R&D within the USA that exceeded a figure, called the "base amount," based on its gross receipts of the previous four years, or it could compute the credit using an alternate formula. The extension passed in November provides a more generous alternate formula for computing the credit under certain circumstances, and it also allows companies to take into account research and development conducted in Puerto Rico and US possessions when computing the credit. One hitch is that research expenditures from July 1, 1999, through October 1, 2000, cannot be claimed by a company until October 1, 2000.
In a joint statement, the House and Senate lawmakers who drafted the bill urged the federal government to take a broad view of what expenses should be considered as falling under the category of research and development. The lawmakers also indicated that the Internal Revenue Service should have realistic expectations for record-keeping by companies that claim the credit: legislators "are concerned about unnecessary and costly taxpayer record-keeping burdens and reaffirm that eligibility for the credit is not intended to be contingent on meeting unreasonable record-keeping requirements."
Lawmakers' reactions
Key lawmakers praised the extension. Rep. Bill Archer (R-TX), chairman of the House Ways and Means Committee and a major architect of the extension, said that the extended credit will promote a higher standard of living. "For the first time in a long while, we have extended the tax credit for five years instead of hand-to-mouth year after year, on which no one can fully depend," Archer told House colleagues. "Now businesses can plan for the future."
"I can't overstate how important the R&D credit is to the high-tech community and many other important leading American economic sectors," said Sen. William Roth (R-DE), chairman of the Senate Finance Committee. "The extension offered in this legislation will give businesses the certainty they need and will result in more and higher-paying jobs for American workers."
Rep. F. James Sensenbrenner (R-WI), chairman of the House Science Committee, quoted a 1998 Coopers & Lybrand study that found that the tax credit would stimulate US companies into spending $41 billion more in research and development. "This, in turn, would lead to greater innovation from additional R&D investment and would begin to improve productivity almost immediately, adding more than $13 billion a year to the economy's productive capacity by 2010," said Sensenbrenner.
Moreover, the tax credit would help to compensate for stagnant growth in federal spending on research, he said. "As federal discretionary spending for R&D is squeezed, incentives must be used to maximize private-sector innovation and maintain our global leadership in high-tech, high-growth industries that help keep our economy the strongest in the world," said Sensenbrenner.
The Clinton administration also took credit for the tax development, issuing a statement touting the credit as one component of a federal budget that "included an unprecedented commitment to key civilian research." But Democratic praise for the tax credit stuck in some Republican craws, due to the administration's reluctance to make the credit permanent and the simultaneous insistence by some Democrats that the credit should indeed be made permanent.
For example, Rep. Zoe Lofgren (D-CA), whose district includes part of Silicon Valley, touched a nerve when she praised the extension to House colleagues, saying, "Our party's position . . . is that the R&D tax credit should be permanent. This five-year extension is really in the right direction. I am happy to support it. But next year we are going to go for permanent."
In reaction, Rep. Mark Foley (R-FL), a member of the House Ways and Means Committee, protested that Secretary of the Treasury Lawrence H. Summers "vehemently opposed" making the tax credit permanent. "If that is the position of the Democratic party, we would like the Secretary of the Treasury to be informed of that position," said Foley.
Other lawmakers, both Democrats and Republicans, have made brave sounds about making the credit permanent next year. But that seems unlikely, given the political climate in 2000: with a Presidential election in the offing and the entire House of Representatives up for re-election, lawmakers are expected to do the minimum necessary and adjourn so they can spend as much time as possible campaigning. In that environment, tinkering with a tax credit that still has four years left before it expires is sure to be a low priority.