Research community backs R&D tax credit Changes in two provisions of the U.S. tax code—one dealing with the R&D tax credit, the other the allocation of R&D expenses to foreign income—are essential to improving the rate of growth of R&D in the U.S., according to several groups testifying before the Senate Finance Committee's Subcommittee on Taxation & Debt Management earlier this month. Sen. Max S. Baucus (D.-Mont.), chairman of the subcommittee, is actively supporting legislation designed to resolve these two issues. Since 1981, companies have been able to claim a tax credit of up to 25% of increases in R&D spending as an incentive to do more research. The Tax Reform Act of 1986 reduced that credit to a 20% incremental rate and would continue the credit only through 1988. Sen. John C. Danforth (R.-Mo.) introduced S. 58 this past January to make the credit permanent at a higher rate. The research community, led by the newly formed Council of Research & Technology— Coretech—went before the Senate subcommittee with new evidence to support the R&D tax credit. "Some government incentive is needed to make sure enough R&D is done and a tax credit is an appropriate way to provide this/' Martin N. Baily told the subcommittee. Baily and Robert Z. Lawrence are fellows at the Brookings Institution, Washington, D.C., who just completed a study for Coretech on the effect of the tax credit on R&D spending. They found that while the credit was in place between 1981 and 1985, industry spending for R&D increased 7% more than it would have without the credit. This is not a very large difference, Baily admits, but it demonstrates to him that the incentive should even be greater. Both university and industry representatives also support the tax credit. Hans M. Mark, chancellor of the University of Texas, told the Senate panel that the current twoyear extension of the R&D tax credit is simply too short to give the credit a chance to be fully effective. Mark also said that corporate gifts of educational instruments to universities should be deductible. Pres-
ently only instruments used exclusively for research qualify. He views this distinction between education and research equipment as impossible to manage and says it should be revised. From industry, Joseph A. Saloom, senior vice president of M/A Com Components of Burlington, Mass., and speaking on behalf of Coretech, stressed the importance of R&D in boosting economic competitiveness and the need to strengthen the research infrastructure at universities. He cited Baily and Lawrence's data indicating that the original 25% incremental R&D credit would add $17 billion to the U.S. gross national product by 1991. Saloom also argued that new companies and corporate joint ventures should be eligible for the R&D credit. Not all the witnesses favor the tax credit as the means to stimulate R&D. Robert Eisner, professor of economics, Northwestern University, said, "The current 20% R&D tax credit is a flawed tool." His analysis of the data collected since the 1981 inauguration of the credit indicates that the net result has been a decline, not increase, in the rate of growth of R&D spending. Eisner maintains that free market conditions are a better way to stimulate R&D and that the government would
Baucus: supports tax code changes
do better to support research with grants. "Extending and increasing the current credit would promise to squander some $2 billion per year," Eisner said, "contributing to bigger budget deficits, higher taxes, and the sacrifice of potential real support for research and innovation." The second tax issue of concern to industry is Department of the Treasury regulation 861-8. According to Baucus, this regulation provides "that a portion of the domestic R&D expenses of a company with overseas operations may have to be allocated against foreign income. But many foreign countries do not permit U.S. companies to take a corresponding deduction for that research. The result has been to encourage companies to shift their R&D efforts overseas." Although Congress has voted a moratorium on this regulation for years, it is due to expire in August. Sen. Malcolm Wallop (R.-Wyo.) has introduced S. 716, a bill that would permanently allow 100% of domestic research expenses to be allocated against domestic income. A coalition of multinational companies represented by Dean O. Morton, chief operating officer of HewlettPackard, Palo Alto, Calif., told the subcommittee that Treasury regulation 861.8 is a major disincentive to research. He said that, though a 100% moratorium is preferred, his coalition would be willing to accept a compromise 67% moratorium on the amount U.S. firms must apply to foreign earnings. The Administration opposes letting industry write off all of its domestic R&D expenses against domestic income. Even a 75% rate would cost the government more than $3.5 billion in lost taxes over five years, Treasury officials estimate, far too high considering the austere budget environment. It is expected that the early expiration date of the current Treasury regulation 861.8 moratorium will mean that this issue will receive the most immediate attention. Although a serious concern, the R&D tax credit, not due to expire under the tax reform law until the end of 1988, may not see much Congressional action until next year. David Hanson, Washington April 27, 1987 C&EN
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