Research & Development tax credit: an extension that should be cut off

As most everybody probably is aware, the fate of "extender" legislation--legislation to extend the term of various corporate tax breaks enacted as part of the huge Bush corporate tax break package--is at this point uncertain.  The House passed HR 6049 some time ago, with the various corporate extenders as well as several energy tax breaks.  These "popular" extenders (that is, popular with the lobbyists, like the National Association of Manufacturers, that think pork for corporations is just dandy) include almost $9 billion for one year's extension of the R&D credit (for research that companies have to do anyway if they want to compete, now more than ever in a globalized environment), and more for the active financing exception (a boon to financial institutions that operate overseas), and another boon to corporations operating overseas in the look-through provisions under Subpart F.  Consider NAM's chief John Engler's statement about why the R&D credit is needed in spite of the fact that research is just an ordinary expense of business like any other deductible expense:

If the theory of having the R&D tax credit, which I believe is to encourage additional research and development investment, then you need to have the tax credit be permanent so people can make longer term strategic commitments because you aren't are going to invest in building a lab and a staff of researchers based on a commitment," he said. "What I see out in the world is pretty good competition for these jobs."  Heather Rothman, NAM Chief Urges Congress to Move on R&D Tax Cut, BNA Daily Tax Report, June 24, 2008.

Come on.  Common sense says that corporations that need to invest in a lab in order to stay competitive (like, say, pharmaceutical companies) will do it whether or not they get the gift of an accompanying tax credit.  It also says that companies don't make long-term commitments based solely on whether or not there's a credit (instead of a deduction) in the tax code, because history shows that the tax code can be (and is) revised on an annual basis.  In fact, you can certainly interpret the legislative history to say that the GOPers that now want these extensions so badly (but not bad enough to pay for them) enacted them all as temporary provisions under the argument first that they were giving back the surplus (of course, that evaporated very quickly) and then that the cuts would provide a needed short-term stimulus to the economy and were simply too expensive for enacting as permanent provisions.   Lots of the purportedly temporary provisions are aimed at letting companies expense their investments rather than taking them into account over time as deductions--the R&D credit is just one more corporate welfare element like those accelerated depreciation provisions.

Although I think most of these extender tax breaks for corporations are unsound and shouldn't be extended (many were on the decades long wish list that most tax practitioners had thought had a snowball's chance in you-know-where to be enacted prior to Bush taking office), at least the House purported to pay for the corporate breaks with revenue raisers (eliminating deferral treatment of offshore compensation for hedge fund managers and extending out even further the delay in implementation of a tax break enacted to benefit multinational corporations (the worldwide interest allocation scheme, that let's corporations use the fungibility of money to decrease their US taxes). 

The Senate has stalled on action, based on Dems' refusal to let go of pay-as-you-go (about time they applied it, since they've been honoring it in the breach mostly) and the GOPers' refusalto accept paying for their largesse to corporations by removing some of the other pork they've put in the corporate pie.  My wishful thinking says that maybe for once the partisan fighting will yield a good result--letting these corporate extenders hit the dust bin for once and for all.   I hope that at least the Senate Dems will have the spine not to cave on paying for these extensions with revenue offsets, if they do enact them.

Comments

[Mory]

Your missing the point of John Englers comments. There are a great deal of countries that would benefit if we do not extend the R&D credit all of the high tech jobs would be moved outside the US. This is not a Democratic or Republican issue its a jobs issue. Please keep that in mind and don't let your political views cloud your judgement.

[LindaMBeale]

Corporations tend to argue "jobs" when the particular subsidy they seek hasn't got much at all to do with keeping jobs here but more to do with tax breaks for activities already planned and already ongoing. My point is that it isn't clear at all that corporations that need to do research won't continue to go about it in the ordinary way without being subsidized with the R&D credit. Remember that, in practice, the US is actually a tax haven for corporations, so the idea that they need a credit to put them on a level playing field globally doesn't hold water.

[andy]

"Common sense says that corporations that need to invest in a lab in order to stay competitive (like, say, pharmaceutical companies) will do it whether or not they get the gift of an accompanying tax credit. "

So your argument is that businesses do not make decisions at the margin? Interesting...

[LindaMBeale]

My argument is one that former Treasury Secretary Snow made--that companies that need to expand in order to stay competitive will almost always do so, without having to have a government subsidy to do it.
That said, it's clear that there may be a company here or there for which the government subsidy would be the straw that leaned the scale far enough towards investment now that it would invest now rather than later. I'm saying that effect will be de minimis, and not worth it, in the sense that the government isn't really getting its money's worth from the R&D credit, because most of the credit is supporting research support that would have been done anyway. Something I didn't mention in the original post I also wonder about and am curious what readers think. Say a company is "on the brink" where the tax subsidy of a credit is enough to lead it to make renewed investment. Is there any reason to think that such a company might be more likely to be in less than sound fiscal health in the first place?

[andy]

"That said, it's clear that there may be a company here or there for which the government subsidy would be the straw that leaned the scale far enough towards investment now that it would invest now rather than later. I'm saying that effect will be de minimis, and not worth it, in the sense that the government isn't really getting its money's worth from the R&D credit, because most of the credit is supporting research support that would have been done anyway."

That's a fair point and I probably agree, unless someone gave me empirical data to the contrary.

"Something I didn't mention in the original post I also wonder about and am curious what readers think. Say a company is "on the brink" where the tax subsidy of a credit is enough to lead it to make renewed investment. Is there any reason to think that such a company might be more likely to be in less than sound fiscal health in the first place?"

Probably a case-by-case situation. One might argue that govt should let businesses rise and fall without intervention. However, the arguments against the R&D credit may apply with equal force against more socially palatable programs (e.g., minority preferences in contracting).