R&D Tax Credit Expires

(July 2, 1999) The Research and Development Tax Credit expired on June 30. It has expired before, and been re-extended. Several bills are pending which would make the credit permanent. Rep. Zoe Lofgren (D-CA) and others want the House to vote on a bill after the July 4 recess.

The R&D Tax Credit has become a perennial issue in Congress. The credit was first enacted in 1981 as a temporary measure, and has been extended on eight occasions since then. Under the most recent scheme, corporations receive a 20% tax credit for qualified research and development expenditures (QREs) in excess of a calculated base amount.

Making the R&D tax credit permanent has long been one of the leading legislative goals of major computer and software companies, and the trade groups which represent them. However, attempts to make it permanent in the past have failed.

Several bills have been introduced in the 106th Congress (including S 195, S 680, HR 760, HR 835, S 951, HR 1682, and HR 2086) that would make the credit a permanent feature of the Internal Revenue Code.

	Rep. Lofgren

Rep. Zoe Lofgren (D-CA) (web site | bio), who is cosponsoring several of the bills, called for a floor vote on any bill after the July 4 break. "The odd thing about this issue is that it enjoys broad bipartisan support, yet time after time it is extended with only for a short-term," said Rep. Lofgren in a press release on June 30. "Perhaps the powers that be see value in having this battle in each and every Congress. But the people of Silicon Valley and the U.S. economy are left to suffer. I see this issue as a good opportunity to end the stagnant-quo of business as usual in Congress."

"I am asking the Republican Leadership to follow-up their words with action, to act now ­ today if possible ­ and agree to put this worthy bill H.R. 835 on the floor calendar for a vote the week of July 12th to help American industry fulfill its potential."

"Republicans are in control of what bills go to the floor," Rep. Lofgren told Tech Law Journal on July 1. "Since they have not brought it to the floor, one must wonder why not." She added that, "I know that if they brought it to the floor, it would pass."

House Minority Leader Dick Gephardt (D-MO) also issued a statement in support of the R&D tax credit on June 30. "The R&D tax credit is critical to an expanding technology industry and an increasing job base for American workers. The R&D tax credit has helped make important components of the US economy like computer software and hardware, biotechnology and other high-tech sector global leaders and job generators -- we must make sure this growth continues." (See, entire statement at bottom of page.)

Also, Rep. Gephardt attacked Republicans: "Unfortunately, some Republicans in Congress [are] more interested in generating rhetoric than in passing legislation to benefit a critical US industry. We must move beyond the vague generalities of the 'e-Contract' and actually accomplish concrete legislative achievements like a permanent extension of the R&D tax credit."

Rep. James Sensenbrenner

The companion bills, S 195, sponsored by Sen. Barbara Boxer (D-CA), and HR 760, sponsored by Rep. James Sensenbrenner (R-WI), would merely permanently extend the tax credit (by deleting subsection (h) of Section 41 of the IRC of 1986). In addition, HR 2086 is a multi-purpose bill which also contains the same R&D tax credit provisions as S 195 and HR 760.

Rep. Sensenbrenner is also anxious to pass his bills. He wrote to House Ways and Means Committee Chairman Bill Archer on June 22. He stated, "I am writing to express my strong support for a permanent extension of the Research and Development Tax Credit (R&D Tax Credit) as proposed in H.R. 760 and H.R. 2086, the Networking and Information Technology Research and Development Act of 1999. As you know, the R&D Tax Credit expires on June 30. Thus, I believe that it is critical that we act quickly to permanently extend this credit."

However, there are also several other proposals. S 680, sponsored by Sen. Orrin Hatch (R-UT), and HR 835, sponsored by Rep. Nancy Johnson (R-CT) would both permanently extend the tax credit, and raise the alternative incremental credit rates. The latest entries are S 951, sponsored by Sen. Pete Domenici (R-NM) and HR 1682, sponsored by Rep. Heather Wilson (R-NM). These companion bills would make permanent the credit, change the alternative incremental credit, expand the credit to support collaborative research and development, and make it easier for small and start-up businesses to access the credit.

About one third of the House is cosponsoring HR 835, while about one third of the Senate is cosponsoring S 680.

The R&D tax credit was first enacted in 1981. It was given a four and one half year duration. Since then, it was extended in 1986, 1988, 1991, 1993, 1996, 1997, and 1998 for periods of three, one, one, one, one half, three, and 11/12s years, respectively. It lapsed briefly in 1995.

In 1981, the tax credit was 25%. However, it was reduced to 20% in 1986, and has remained there since. In 1996 the Alternative Incremental Research Credit (AIRC) was added, providing electing corporations the opportunity to claim credit at reduced rates for QREs exceeding lower base amounts.

The R&D tax credit is widely supported in high tech and other industries. On July 1, the House Science Committee's Subcommittee on Technology held a hearing on HR 2086. Laura Allbritten, of PeopleSoft, and other witnesses, testified in favor of making the credit permanent.

The National Association of Manufacturers and other industry groups are lobbying to make the credit permanent. "The process of renewing this tax credit virtually every single year leaves an important sector of the economy on a perpetual roller coaster," said Monica McGuire, of NAM, in a press release. "R&D drives productivity, and Alan Greenspan has said that the resulting technological advances are primarily responsible for our remarkable economic growth without inflation over the past few years. Making the R&D tax credit permanent would go a long way toward ensuring that the economy continues to grow at a healthy pace – not to mention helping the U.S. maintain its global leadership in technology." McGuire is NAM's senior policy director for taxation.