Senate Finance Committee Holds Hearing on R&D Tax Credit

9/20. The Senate Finance Committee (SFC) held a hearing titled "Tax Reform Options: Incentives for Innovation", which focused on the research and development (R&D) tax credit.

Sen. Max Baucus (D-MT), the Chairman of the SFC, wrote in his prepared testimony [PDF] that "The U.S. still leads the world in international patent filings, but we risk losing that title. While our international patent applications fell slightly from 2006 to 2010, China's tripled. We aren’t doing enough to support our research and development sectors, and this puts our country’s competitiveness at risk."

He added that "Today, out of the 21 OECD nations, the U.S. ranks 17th in tax incentives for research and development."

Sen. Orrin Hatch (R-UT), the ranking Republican on the SFC, wrote in his prepared testimony [PDF] that "there are steps that this Congress could take today to start turning the economy around and create American jobs, and those steps begin with the promotion of innovation. ... Reauthorizing the R&D credit, and making it permanent, would be a real lift for our economy."

On September 19 Sen. Baucus, Sen. Hatch, and others introduced S 1577 [LOC | WW | PDF], the "Greater Research Opportunities with Tax Help Act", or "GROWTH Act", a bill that would revise and make permanent the R&D tax credit. See, related story in this issue titled "Senators Introduce R&D Tax Credit Bill".

Scott Wallsten of the Technology Policy Institute (TPI) wrote in his prepared testimony that "R&D exhibits classic positive externalities. In other words, its benefits extend beyond the innovator as others build on it. But that very feature also means that the innovator does not earn all the returns to the investment. Because firms base their R&D spending on their own expected returns, not the social expected returns, they invest less than they would if they could appropriate all the returns. That is, by themselves businesses are likely to invest fewer resources than is efficient from society’s overall perspective."

Wallsten wrote that "government can play an important role in supporting R&D, ranging from conducting R&D itself, to directly financing others to do it, to creating incentives for others to invest their own money in it". He said that the US government does all of these, but, the trick is for government to support R&D that would not take place but for that government support.

He said that "the tax credit appears to be a rather successful policy tool that most studies find does stimulate additional R&D". However, he added that "two factors have probably blunted its effectiveness". First, "its lack of permanent status reduces its ability to coax firms to do more R&D", and second, "how it determines which expenditures are eligible

He also said that incenting private sector R&D entails more than changing tax law. He noted that "most R&D expenditures are for scientists and engineers, and their supply is relatively fixed in the short run. More spending on R&D without increasing the numbers of scientists and engineers may result in higher salaries for people already doing R&D, but not more R&D itself. The most effective way to increase the supply of scientists and engineers in the U.S. is to attract the best from wherever they are, which requires looser immigration policies".

Dirk Pilat of the Organisation for Economic Co-operation and Development (OECD) wrote in his prepared testimony [PDF] that "R&D tax incentives are now widely used in OECD and non-OECD countries. Today, 26 out of the 34 OECD member countries offer R&D tax incentives to business. Amongst non-OECD countries, Brazil, China, India, the Russian Federation, Singapore and South Africa also provide tax incentives for R&D."

He added that "Tax incentives for R&D are expected to lead to an increase in private investment in R&D, which in turn should lead to an increase in innovation outcomes and ultimately to an increase in long run growth."

Michael Rashkin, author of the book titled "Practical Guide to Research and Development Tax Incentives: Federal, State, and Foreign", wrote in his prepared testimony [PDF] that the R&D tax credit "has been ineffective and has not increased R&D spending".

He said that it "now benefits large cash-rich companies, but not cash-deprived start-ups". He argued that it should be "applicable only to innovative research and breakthrough products", and not to "routine, risk-free research". He also urged greater taxation of "R&D and manufacturing operations outside the US".

See also, prepared testimony [PDF] of Annette Nellen of San Jose State University business school.

On September 19, the R&D Credit Coalition released a report [22 pages in PDF], prepared for it by Ernest & Young, titled "The R&D Credit: An effective policy for promoting research spending". See also, release. The R&D Credit Coalition also submitted written testimony for the SFC's hearing. It urged the Congress to enact "a strengthened and permanent research and development incentive as part of any tax reform measure".

People and Appointments

9/20. The Fiber to the Home Council announced in a release that is President, Daniel O'Connell, "will leave the organization in October to take a senior position at a major telecommunications company".

9/20. The Senate confirmed Judge John Ross to be a Judge of the U.S. District Court for the Eastern District of Missouri. See, Congressional Record, September 20, 2011, at Page S5793.

9/20. The Senate confirmed Timothy Cain to be a Judge of the U.S. District Court for the District of South Carolina by a vote of 99-0. See, Roll Call No. 140, and Congressional Record, September 20, 2011, at Page S5793.

More Parties Seek to Block AT&T's Acquisition of T-Mobile USA

9/19. The USA, by the Department of Justice's (DOJ) Antitrust Division, filed the original complaint seeking to block AT&T's acquisition of T-Mobile USA on August 31, 2011. On September 16, the USA and seven states filed an amended complaint that adds the state parties.

Sprint Nextel filed a separate complaint on September 6. See, story titled "Sprint Files Complaint to Block AT&T T-Mobile USA Transaction" in TLJ Daily E-Mail Alert No. 2,300, September 13, 2011. Cellular South filed a separate complaint on September 19.

Also, on September 15, the USA filed an unopposed motion to enter a protective order regarding confidentiality. See also, proposed protective order [13 pages in PDF].

The USA and seven states filed the amended complaint [34 pages in PDF] in the U.S. District Court (DC) on September 16. The original complaint, filed on August 31, named only the USA as plaintiff. This amended complaint adds the states of New York, Washington, California, Illinois, Massachusetts, Ohio, and Pennsylvania. This case is USA, et al. v. AT&T, et al., U.S. District Court for the District of Columbia, D.C. No. 11-01560. See also, story titled "DOJ Files Complaint to Block AT&T Acquisition of T-Mobile USA" in TLJ Daily E-Mail Alert No. 2,298, August 31, 2011.

On September 19, Cellular South and Corr Wireless Communications filed a complaint in the U.S. District Court (DC) against AT&T, AT&T Mobility, T-Mobile USA, and Deutsche Telekom that seeks an injunction against AT&T's acquisition of T-Mobile USA on the grounds that it would would substantially lessen competition in violation of Section 7 of the Clayton Act, which is codified at 15 U.S.C. § 18.

The complaint states that "AT&T already enjoys significant market power over all aspects of the national wireless market and, as a result, wields significant influence over the purchase of wireless devices generally (including cell phones, smartphones and tablets) as well as over the provision of roaming services required by regional carriers, such as Cellular South." (Parentheses in original.)

It continues that "The proposed merger will allow AT&T to increase this influence by eliminating T-Mobile as an independent source of demand for wireless devices and an independent roaming partner. The resulting competitive harm will be felt by regional carriers, including Cellular South, who will find it harder to secure both wireless devices at competitive prices and times and nationwide roaming."

It adds that "The merger of AT&T and T-Mobile is anticompetitive, and will result in consumers facing higher prices, less innovation, fewer choices, and reduced competition."

Senators Introduce R&D Tax Credit Bill

9/19. Sen. Max Baucus (D-MT), Sen. Orrin Hatch (R-UT), and others introduced S 1577 [LOC | WW | PDF], the "Greater Research Opportunities with Tax Help Act", or "GROWTH Act". This is another bill to increase and make permanent the alternative simplified research credit.

The Congress enacted its first research and development (R&D) tax credit bill in 1981 as a temporary measure. Since then the Congress has repeatedly extended it for one or a few years. The credit is now set to expire on December 31, 2011. See, story titled "Tax Bill Enacted With R&D Tax Credit Extension" in TLJ Daily E-Mail Alert No. 2,182, December 18, 2010.

The R&D tax credit is codified at 26 U.S.C. § 41. The existing credit has two calculation formulas. First, the basic credit rate is 20%. But it only applies to research over a certain base amount related to the business's historical research intensity, which is the ratio of its research spending to gross receipts back in the 1980s. It is outdated and obsolete.

Second, the alternative simplified credit (ASC) rate is 14%. It applies only to qualified research expenses that exceed 50 percent of the average qualified research expenses for the three preceding taxable years. For a more detailed explanation of this topic, see the Department of the Treasury's (DOT) March 25, 2011, report [13 pages in PDF] titled "Investing in U.S. Competitiveness: The Benefits of Enhancing the Research and Experimentation (R&E) Tax Credit".

S 1577 would make the R&D tax credit permanent.

It would eliminate the basic formula, effective December 31, 2011. However, it would raise the ASC from 14% to 20%, and revise how it is calculated.

The other original cosponsors of the bill are Sen. John Jerry (D-MA), Sen. Olympia Snowe (R-ME), Sen. Ron Wyden (D-OR), Sen. Mike Crapo (R-ID), Sen. Debbie Stabenow (D-MI), Sen. Jon Cornyn (R-TX), Sen. Maria Cantwell (D-WA), and Sen. Bob Menendez (D-NJ).

The bill was referred to the Senate Finance Committee (SFC), which held a hearing on September 20 titled "Tax Reform Options: Incentives for Innovation". See, related story in this issue titled "Senate Finance Committee Holds Hearing on R&D Tax Credit".

One related, but simpler, bill in the House is HR 942 [LOC | WW], titled the "American Research and Competitiveness Act of 2011".

See also, stories titled "Rep. Gerlach and Rep. Kissell Introduce Another R&D Tax Credit Bill" in TLJ Daily E-Mail Alert No. 2,243, May 17, 2011, "Rep. Carney Introduces R&D Tax Credit Bill" in TLJ Daily E-Mail Alert No. 2,235, May 7, 2011.

More News

9/19. The National Institute of Standards and Technology's (NIST) Computer Security Division (CSD) released its draft SP 800-30 Rev. 1 [85 pages in PDF], titled "Guide for Conducting Risk Assessments". The deadline to submit comments is November 4, 2011.

More News

9/16. The Executive Office of the President (EOP) and the Department of Education (DOE) released a statement regarding a program titled "Digital Promise", which is directed at advancing technologies to transform teaching and learning.

Go to News from September 11-15, 2011.