Too-frequent lapses of the R&D tax credit by Congress have weakened the credit's intended effect, says AdvaMed's Stephen Ubl.
A research and development tax credit that has saved manufacturers billions of dollars expired at the end of 2007. The credit provided much-needed assistance to companies engaged in domestic R&D activities, according to AdvaMed.
But this isn't the first time the credit has lapsed; it has expired 13 times since its inception in 1981. Therefore, AdvaMed has called on Congress to make the credit permanent.
“Extension of the R&D tax credit has unfortunately turned into a biennial event for Congress, weakening [the credit's] intent by interrupting ongoing research and creating a sense of uncertainty, particularly for small and emerging-growth companies,” said AdvaMed CEO and president Stephen Ubl.
A national survey in 2006 showed that 79% of medical equipment manufacturers use the R&D credit. AdvaMed and other trade organizations, such as the National Association of Manufacturers (NAM), are concerned that innovation may be impeded. Small device firms, often drivers of innovation, can particularly feel the effects of not having an R&D tax credit. It could compel manufacturers to move their R&D operations to countries with moregenerous incentives.
“The R&D credit is a jobs credit. Most of it is going toward salaries of people in R&D,” said Monica McGuire, senior policy director of taxation at NAM. “It's keeping those high-wage, high-skill jobs in the United States.”
McGuire, who is also the executive secretary of the R&D Credit Coalition, said the immediate goal is to get the credit enacted retroactively and strengthen it for future years. With R&D endeavors often lasting 5–10 years, a permanent credit would ensure the availability of assistance for the duration of a project.
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R&D Tax Credit by the Numbers
“Having the credit repeatedly expire like this does have a negative effect on R&D,” she said. “Companies cannot plan their R&D budgets [with the reassurance] that the credit exists. The credit's incentive value is mitigated by its continual lapses. Several companies cited a negative impact on their quarterly earnings [when the credit expired in 2006].”
Ubl also stressed the importance of making the tax credit equitable for all companies. The recently lapsed version of the credit includes three formulations that result in some companies receiving a higher tax credit.
“The credit should be permanent so companies can have the full benefit of the credit for long-term planning and research projects,” Ubl said. “An evenly applied 20% rate will encourage more companies to locate their R&D operations in the United States and help to attract the most-qualified workers from around the world.”
The credit appears to have broad bipartisan and bicameral support, and a one-year extension of the credit was included on a tax reform bill passed by the House in November. But the extension was left off a pared-down version of the bill passed by the Senate in December.
NAM also says that the United States has fallen behind its counterparts in the Organization for Economic Cooperation and Development in terms of R&D tax support. In 2007, the United States ranked 15th among the 30 member countries in this metric. Without R&D tax benefits, some form of which are now offered by 20 member countries, the United States drops to last.
“Other countries clearly get it. There's been a tremendous growth of countries offering R&D incentives,” McGuire said. “R&D is the fuel for innovation. It drives new product development and increased productivity. These are the lifelines for growth in manufacturing.”