House Passes Budget Bill With 5 Year Extension of R&D Tax Credit

(November 18, 1999) The House approved a massive $390 Billion budget bill on Thursday, November 18, which includes a five year extension of the research and development tax credit. This bill, which combines 10 other bills, and runs over 2,000 pages in its paper version, has yet to be passed by the Senate.

The R&D tax credit is hardly the most important provision in the bill. However, it is very important to high tech industries. It provides computer, software, and biotechnology companies economic incentive to invest in the development of new technologies. Many high tech industry representatives argue that it is vital for continued U.S. leadership in these areas.

The budget bill is the product of lengthy and extensive negotiations between Republicans, Democrats, and the Clinton administration. The measure was adopted on a roll call vote of 296 to 135. Support was bipartisan. 170 Republicans and 125 Democrats voted in favor. 51 Republicans and 84 Democrats voted against. 4 members missed the vote.  President Clinton supports this bill.

The research and development tax credit was first enacted in 1981 as a temporary measure, and has been extended on eight occasions since then. Under the current scheme, corporations receive a 20% tax credit for qualified research and development expenditures (QREs) in excess of a calculated base amount.

In 1981, the tax credit was 25%. However, it was reduced to 20% in 1986, and has remained there since. In 1996 the Alternative Incremental Research Credit (AIRC) was added, providing electing corporations the opportunity to claim credit at reduced rates for QREs exceeding lower base amounts. The bill just approved by the House would also raise the AIRC rates.

Numerous bills have been introduced in the 106th Congress that would make the credit permanent, including HR 195, S 680, HR 760, HR 835, S 951, HR 1682, HR 2086, and S 1803. Supporters will continue to press for a permanent extension in the next session of the 106th Congress.

"Five years is a pretty good extension," Bill Sample, of the R&D Tax Coalition, told Tech Law Journal after the vote.

"I think that it is a huge step towards getting a permanent extension," said Sample. "We will be working with the Congress and the administration to make the credit permanent in the interim." He added that, "effectively, what this does is make permanence less expensive."

Sample continued that "Nancy Johnson and Robert Matsui were the lead sponsors on the House side, and Orrin Hatch and Max Baucus were the lead sponsors on the Senate side. They certainly deserve a lot of credit."

"The extension itself has very strong bipartisan support," Sample said.

"The leadership in both the House and Senate worked very hard to get the longest possible extension" with the "Republicans being the most aggressive. The Democratic leadership and the White House were talking in terms of an 18 month extension."

"The Republican leadership has staunchly been supporting a five year extension" since the bills were introduced, said Sample.

Rep. Zoe Lofgren (D-CA), a Silicon Valley representative who has long advocated a permanent extension, had this to say. "Included is a five year extension of the R&D tax credit. While not the permanent extension I had sought, it is nevertheless better than more limited extensions previously discussed. This leaves our quest for permanent status before us for next year. Also included is an extension of section 127, excluding employer tuition benefits from taxable income to the employee."

"This five year extension of the R&D tax credit will enable companies to continue their rigorous programs of experimentation, and allow the IT industry to continue innovating at warp speed," said Information Technology Assoc. of America President Harris Miller. "The New Economy will thrive well into the next millennium with the help of the credit. ITAA appreciates the bi-partisan cooperation in support of the credit and asks all lawmakers to look for ways government can enhance the New Economy without regulating it, such as the R&D tax credit."

While the bill is supported by President Clinton, it still has to pass the Senate. Several Senators are obstructing passage of the bill in an effort to win concessions unrelated to the R&D tax credit.

Some Senators also oppose the bill on ideological grounds. For example, Sen. John McCain (R-AZ), stated that "as a conservative, I can not vote for a budget that contains so much unnecessary spending and does nothing to reduce the tax burden on working Americans. " Both the House and Senate passed a tax reduction bill in September, which Clinton vetoed.