Statement by Sen. Pete Domenici (R-NM) in Congressional Record.
Re: Introduction of S 951, an R&D Tax Credit Bill.
Date: May 4, 1999.
Source: Congressional Record, May 4, 1999, Page S4669.

PRIVATE SECTOR RESEARCH AND DEVELOPMENT INVESTMENT ACT OF 1999

Mr. DOMENICI. Mr. President, today I am joining my cosponsors, Senators Bingaman, Frist, Lieberman, and Snowe, in introducing the Private Sector Research and Development Investment Act of 1999.

This bill makes the research tax credit permanent and significantly improves the structure of that credit. Many Senators are for this extension, and it is high time, and for the permanentization of this credit.

This also adjusts the credit to today. That credit was put in place many years ago, and much of what it does doesn't fit today's industrial base, including many startup companies that cannot take the right kind of credit.

We have made some changes which will make it cost a little bit more, but I think the Finance Committee should take a look at some of the changes that are in this Domenici-Bingaman bill, because it will make the credit more effective and more available.

In March of 1998, 150 of our Nation's top decisionmakers met at MIT for the first national innovative summit. The summit leaders included CEOs, university presidents, labor leaders, Governors, Members of Congress, and senior administrative officials.

In essence, they conclude that in order to keep the United States of America on the cutting edge of research that can be applied to innovative things for America's future and for our businesses, that we must make this tax permanent, that dollar for dollar it is the best investment in both general research and specific research to keep America strong and competitive in the world.

When those people say dollar for dollar it is the most effective, they are saying it is more effective than programmatic assistance to research, which obviously is very necessary, and we continue to expand upon and have it grow. But if you don't make this permanent, you are losing a lot of research by American businesses, No. 1. If you don't correct it, you will lose the effectiveness among companies that need it the most. And third, you will see to it that more, rather than less, American companies do research overseas.

Research jobs are great jobs. They are just as much a part of America's basic prosperity as are the jobs that come from that research by way of products or activities.

Mr. President, advanced technologies drive a significant part of our nation's economic strength. Our economy and our standard of living depend on a constant influx of new technologies, processes, and products from our industries.

Many countries provide labor at lower costs than the United States. Thus, as any new product matures, competitors using overseas labor frequently find ways to undercut our production costs. We maintain our economic strength only by constantly improving our products through innovation. Maintaining and improving our national ability to innovate is critically important to the nation.

The majority of new products requires industrial research and development to reach the market stage. I want to encourage that research and development to create new products to ensure that our factories stay busy and that our workforce stays fully employed at high salaried jobs.

I want more of our large multi-national companies to select the United States as the location of their R&D. R&D done here creates American jobs. And since frequently the benefits of research in one area apply in another area, I want those spin-off benefits here, too.

Congress created the Research Tax Credit to encourage companies to perform research. But many studies document that the present form of this Tax Credit is not providing as much stimulation to industrial R&D as it could. Today, we're introducing legislation to improve the Research Tax Credit.

In March of 1998, 150 of our nation's top decision makers met at MIT, for the first National Innovation Summit. The Summit included corporate CEO's, university presidents, labor leaders, governors, members of Congress, and Senior Administration officials.

At the Summit, these experts discussed the health of the future national research base. More than three-quarters of them thought that the quality of that base would be no better or worse than it is today, with nearly one third projecting that it would be weaker.

The Summit participants singled out the Research Tax Credit as the policy measure with the greatest potential for a positive near-term impact. The Council on Competitiveness, who co-sponsored that Summit, stated that `making the [Research] Tax Credit permanent reflected a widely share consensus among leaders whose companies and universities contribute decisively to the nation's economy.'

The single most important change in our bill is to make the Credit permanent. Many studies point out that the temporary nature of the Credit has prevented companies from building careful research strategies.

Many of my colleagues in Congress have also expressed interest in making the Credit permanent. But we're urging them to go beyond that action and, at the same time, address shortcomings that have been identified in the current Credit. I want to use the current enthusiasm for permanence to also craft a Credit that will better serve the nation.

For example, the current Credit references a company's research intensity back to 1984-88. That's too outdated to meet today's dynamic market conditions. Many companies are involved today in products that weren't even invented in 1984.

Our legislation allows a company to base their credit on their research intensity averaged over the preceding eight years. It also allows companies to stay with the current formulation of the Credit if they prefer.

Our bill builds other improvements into the Credit as well. For example, the Alternative Research Credit component has been criticized because it only rewards the maintenance level of a company's research, it does not provide significant motivation to increase research intensity. With our proposed changes, the Alternative Credit now incorporates the same 20 percent motivation for increased research intensity that is found in the regular Credit--this is a major improvement. We also increase the base level of the Alternative Credit significantly.

The current Credit has a provision that severely restricts the ability of start-up companies to fully benefit. Analysis by the Congressional Research Service showed that 5 our of 6 start-up companies received reduced benefits because of a current provision that limits their allowable increase in research expenditures.

I'm concerned when start-up companies aren't receiving full Credit. These are just the companies that drive the innovative cycle in this country; they are the ones that frequently bring out the newest leading-edge products. Our legislation thus drops this limitation and introduces additional help for start-up businesses.

Our legislation addresses several other shortcomings in the current Credit as well. Now there is a `Basic Research Credit' allowed, but rarely used. This should be encouraging research conducted at universities.

But that part of the Credit is now defined to include only research that does `not have a specific commercial objective.' There aren't many companies that want to support--much less admit to their stockholders that they are supporting--research with no commercial interest. The idea of this clause was to encourage support of long term research, which is a fine idea.

This is the kind of research that benefits far more than just the next product improvement. It can enable a whole new product or service and we need to encourage it.

Our legislation adds major incentives for basic research by dropping the requirement that only increments above a baseline can be used and by including any research that is done for a consortium of U.S. companies or any research that is destined for open literature publication. We're also allowing this Credit to apply to research done in national labs.

And finally our legislation recognizes the importance of encouraging companies to use research capabilities wherever they exist in the country, whether in other businesses, universities, or national labs. The current credit disallows 35% of all expenses for research performed under an external contract--our legislation allows all such expenses to apply towards the Credit when the research is performed at a university, small business, or national laboratory.

In summary, this bill incorporates all the improvement suggested in other bills that primarily make the credit permanent and provide some increase in the alternative credit. But this bill goes further and corrects weaknesses in the current formulation of the Credit. I want to seize this opportunity to make the Research Tax Credit a tool that will truly meet the goals for which it was established.

The fact that this bill addresses significant shortcomings in the current Credit has not gone unnoticed. Spokesman for several groups that endorse this bill are here with us today. After Senator Bingaman speaks, I'll invite representatives from the Council on Competitiveness, the National Association of State Universities and Land Grant Colleges, the National Coalition for Advanced Manufacturing, and the American Association of Engineering Societies to add their perspectives.

With this new bill, we will significantly strengthen incentives for private companies to undertake research that leads to new processes, new services, and new products. The result will be stronger companies that are better positioned for global competition. Those stronger companies will hire people at higher salaries with real benefits to our national economy and workforce.

I ask unanimous consent that the text and a summary of the bill, section by section, be printed in the Record.