In Praise of the R&D Tax Credit

by Douglas E. Schoen

Things haven’t been looking good for our economy – or how Americans view the President’s handling of it. A recent Fox News poll found that the economy is the country’s top worry, with 93% of voters extremely or very concerned. A stalled economy with voters lacking confidence in the policies of its chief executive: It’s a vicious circle.

But these numbers don’t necessarily spell doom for Democrats in November. President Obama just unveiled an economic plan that differs from his past proposals in at least one important respect: Republicans will be hard-pressed to complain about it.

I should know. I’ve been a vocal critic, from the center, of Obama’s economic agenda up to this point. But this new plan isn’t just smart politics. It’s smart policy.

The plan’s chief component, improving the research and experimentation tax credit, is a stroke of genius. If Republicans try to criticize this reform, they will look like shallow partisans who don’t want the best for the country in its time of need.

The credit, aimed at encouraging innovation in a host of industries, was first passed in 1981. It comes in two versions: a complex calculation that gives businesses a 20% deduction over a base amount, and a straightforward formula that offers a 14% deduction above the base.

Obama’s economic plan expands the credit by about 20% and raises that simple 14%  deduction to 17%. If you think those numbers sound small, you don’t realize how many billions of dollars are in play.

He’d also make the credit permanent. Over the past three decades, it’s expired and then been renewed many times – but not always. Indeed, legislators let the credit expire between July 1995 and June 1996. And the credit expired again at the end of 2009, and has yet to be renewed.

That uncertainty is bad for business. Research and development is a complex process that takes years of planning. Equipment must be purchased, and employees must be hired. Sometimes companies hold off on increasing their R&D budgets until they know the credit will be extended.

A study prepared for Congress’ Office of Technology Assessment found a tight relationship between money put toward new research and the level of certainty that R&D tax credits would stick around.

Republicans often argue for a tax code that’s simpler and easier to predict. Obama’s plan delivers that for the R&D credit.

Republicans have frequently complained that Obama’s economic policies sacrifice our economy’s long-term health for short-term gain. But improving the R&D credit is forward-thinking, as it’s particularly beneficial to the industries that are the future of our economy. Consider biotechnology, which stands to have its tax burden lightened under this credit. This industry has been resilient through the troubled economic times of the past few years.

According to a recent study from Battelle, the bioscience sector grew 1.4 percent during the first year of the recession, while overall private sector employment declined 0.7 percent.

Republicans often talk about the importance of incentives to innovation. Making the tax credit permanent would induce a flood of new R&D spending. Academic studies have found that every tax dollar deducted fuels between one and three dollars in R&D investment.

Increased R&D won’t just make us more prosperous – it will save lives.

Pharmaceutical development has reduced mortality and improved the quality of lives for countless Americans. Agricultural biosciences have allowed farmers to grow more food. Soon, we’ll be talking about how alternative energy technology has reduced our reliance on coal and oil.

But it’s not just educated scientists, researchers, engineers and technicians who will find work. Construction workers, IT professionals, food service workers, accountants and others will get jobs, too.

So, given the merits of the proposal, it’s a slam dunk, right?

Wrong. Republicans and Democrats alike are in election-year mode. That means, even with the economy ailing, they’re looking for issues, not answers.

The President needs to take political steps right now to get over that hump.

Extending the Bush tax cuts – all of them – appears to be nonnegotiable for Republicans. Just this week, Senate Minority Leader Mitch McConnell (R-Ky.) promised to filibuster any extension that does not continue cuts for high earners.

Obama should meet with the GOP leadership, namely McConnell and House Republican Leader John Boehner of Ohio, and offer a grand bargain: A two-year extension of the Bush tax cuts and larger writeoffs on capital expenditures in return for Republican support.

This credit should attract moderates and more open-minded members of the GOP. Provided anyone’s really listening.

Douglas Schoen is a political strategist and author of the just-released book, Mad as Hell: How the Tea Party Movement is Fundamentally Remaking Our Two-Party System (Harper 2010), co-authored with Scott Rasmussen

Leave a Comment