EIA supports a strong, permanent research and development (R&D) tax credit of commensurate rate for all companies; a 20% simplified credit; and an extension of the traditional credit. The current credit is due to expire on Dec. 31, 2007, and EIA is among the industry leaders vigorously advocating to ensure its strengthening and its seamless availability.
The R&D credit is available only for work done in the U.S., and it applies only to that portion of a company's expenses directly related to U.S. research and development, above a base amount. On average, companies invest $94 in R&D for every $6 the federal government invests in the tax credit, so the return on investment is substantial. Since its enactment in 1981, the R&D tax credit has been a powerful and effective incentive for firms to increase research spending. Congress has endorsed the credit by extending it 12 times since its enactment and by strengthening it in 2006. However, it was once allowed to lapse, has several times been reinstated retroactively and has never been made permanent, creating a less stable and certain investment atmosphere for companies.
EIA applauds the enhancements passed by Congress in 2006, which added an elective Alternative Simplified Credit (ASC) that will help more companies that invest in R&D activities utilize the credit. The simplified credit equals 12% of a company's excess current-year qualified research spending over 50% of the company's average research spending for the prior three years. Increasing the rate for the simplified credit this year from 12% to 20% would ensure that all companies benefit at a commensurate rate.
Impact on EIA Members
Allowing the credit to expire would drive up the cost of R&D by as much as 7.5% for many companies, potentially leading to layoffs for highly skilled workers and a shift in R&D to other countries with more generous tax incentives, such as Canada, China, Ireland or Singapore. While companies of all sizes use the benefit, the value of the credit as a percentage of assets has traditionally been highest for smaller companies, reaching as much as 9.4%.
Permanence is a particularly critical feature to maximize the impact of the R&D credit. If there is any uncertainty regarding the availability of the credit, companies discount its value. This has the counterproductive effect of reducing the credit's benefit to the economy while not affecting the overall cost of the credit. In addition, some studies reveal that it may take up to five years for a company to fully adjust to a change in the after-tax cost of R&D. Thus, a long-term focus is necessary to allow companies to fully change their investment behavior.
The social return from basic and applied corporate R&D is, on average, twice as high as the private return from R&D. In some industries, the social return is eight times the private return. Generally, businesses do not consider the benefits to society when making their R&D investment decisions, resulting in an economy-wide underinvestment in R&D. Thus, the R&D credit is important to reduce the after-tax cost of these investments. Without the R&D credit, there would be less innovation, less technological breakthroughs and greater loss of market share to foreign competitors.
Current Standalone Legislation
S. 41, sponsored by Senator Max Baucus (D-MT)
H.R. 1712, introduced by Rep. Eddie Bernice Johnson (R-TX)
H.R. 2138, sponsored by Reps. Sander Levin (D-MI) and Dave Camp (R-MI)
Industry Efforts
For more information, please visit the website of the R&D Credit Coalition, of which EIA serves as a steering committee member.
