Senate Endorses Permanent R&D Tax Credit

(July 14, 2000) The Senate adopted an amendment to the estate tax bill on July 13 to make the R&D tax credit permanent. However, the Senate then removed this and other amendments on July 14 before passing the bill. The 98 to 1 vote was a larger symbolic statement of support for making the tax credit permanent.

The vote provided Senators the opportunity to vote for making the research and development tax credit permanent -- a measure strongly supported by high tech companies -- without actually decreasing federal tax revenues. Not only did they strip the amendment from the underlying bill, but Clinton has promised to veto the estate tax bill.

The R&D tax credit is a perennial issue in Congress. The 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.

At the end of last year, the Congress passed, and the President signed, a bill which extends the R&D tax credit for another five years. Nevertheless, efforts to make the credit permanent continue.

Several bills introduced in the 106th Congress (including S 195, S 680, HR 760, HR 835, S 951, HR 1682, and S 1803) would make the credit a permanent feature of the Internal Revenue Code.

Sen. Orrin Hatch (R-UT)

Sen. Orrin Hatch (R-UT) is the sponsor, along with Sen. Max Baucus (D-MT), and others, of a stand alone bill to make the R&D tax credit permanent. That bill, S 680, is cosponsored by 20 Republicans and 26 Democrats. However, it has not made it out of committee.

The Hatch amendment [No. 3823] amended HR 8, the Death Tax Elimination Act. That bill, which passed the House on June 9, 2000 by a vote of 279 to 136 would provide for a phased-in repeal of estate, gift, and generation-skipping taxes. Bill Clinton has promised to veto it.

Sen. Hatch explained his amendment on the Senate floor on Thursday, July 13. He stated that "in 2004, corporate America will have to go through this rigmarole again. This tax credit has been on and off, extended and expired, a legislative certainty or a legislative football almost more times than anyone can count."

"Anyone in this body who has been in business for more than 10 minutes knows that planning and budgeting -- unlike what we do here in Congress -- is a multiyear process. And, anyone who has been involved in research knows that the scientific enterprise does not fit neatly into calendar or fiscal year."

"Our treatment of the R&E tax credit -- that is, allowing it to run to the brink of expiration and reviving it at the 11th hour -- is a disservice to our research entities and, yes, our whole country."

"In all, there are more than 80,000 employees working in Utah's thousands of technology based companies. Many other states have experienced similar growth in high technology businesses. Research and development is the lifeblood of these firms and hundreds of thousands like them throughout the nation," said Sen. Hatch.

"Research and development is essential for long-term economic growth. Innovations in science and technology have fueled the massive economic expansion we have witnessed over the course of the 20th century. These advancements have improved the standard of living for nearly every American. Simply put, the research tax credit is an investment in economic growth, new jobs, and important new products and processes."

	Sen. Max Baucus (D-MT)

Sen. Baucus also spoke in favor of the amendment during debate on the Senate floor. He stated that "It is high time that we make the R&D tax credit permanent. It is almost impossible to come up with a reason why it is not permanent. It is like a yo-yo -- on for a year and off. Then they have to make it retroactive. It is nuts.

"Business abhors uncertainty. If we can make this permanent, that is one uncertainty that can be dispensed with," said Sen. Baucus. "Obviously, the United States is going to remain the powerful economic engine in research and development, and the tax credit should be made permanent. It is a key part of that."

Tech Law Journal talked to Bill Sample, Chairman of the R&D Credit Coalition, on Friday, July 14, about the estate tax bill and the R&D tax credit amendment. He stated that "this basically has turned into a theme bill, that the Senators expect to be vetoed." That is, it is being "used as a vehicle to signal their tax priorities."

"I don't think we expect the R&D tax credit to be enacted," in this Congress, said Sample. "We do appreciate the support the Senators are showing."

Sample continued that the prospects for permanently extending the tax credit next year are better. "The credit continues to enjoy strong bipartisan support." Moreover, "both Presidential candidates support making the R&D tax credit permanent."

He concluded that "we plan to try to make it permanent in 2001."

There are still a few other platforms that it might be used for the R&D tax credit in the current Congress, including the bill addressing the foreign sales corporation issue and a reconciliation bill.

The R&D tax credit was first enacted in 1981. It was given a four and one half year duration. Since then, it was extended in 1986, 1988, 1991, 1993, 1996, 1997, 1998, and 1999 for periods of three, one, one, one, one half, three, 11/12s, and 5 years, respectively. It lapsed briefly in 1995.

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.

Another amendment to the estate tax bill that was adopted on July 13, but stripped from the bill on July 14, was a measure to repeal the excise tax on phones. The House has already passed this as a stand alone bill. Communications companies have long opposed this "tax on talking."