Innovation should be rewarded and the U.S. government should use federal funds to foster a culture of discovery. Virtually everyone agrees with this broad premise. But, as with many things on Capitol Hill, the devil is in the details.
On that note, let’s talk about the Research and Experimentation Tax Credit. Every couple of years, Congress votes to extend the so-called R&D Credit—a significant tax break for corporations that invest in research and development. Beneficiaries of the credit include many of the usual suspects (think Boeing and Dow Chemical) but also small businesses and even tech start-ups.
Right now the R&D Credit is a temporary measure, an adaptation of President Reagan’s 1981 tax break that was launched to ensure that the U.S. economy kept Japan on its toes. But since then, Congress has renewed it without fail (more or less) 15 times. This year, it almost looked like the R&D Credit might be extended permanently—a move that industry experts say would shield science and technology companies from the losses that they take every time it expires.
Spoiler: it didn’t happen. Last week, Congress begrudgingly renewed the R&D Credit retroactively for another year and, at least for now, all hopes of it becoming a permanent incentive for cutting-edge research are dashed.
“This place is dysfunctional,” Representative Jim McDermott said during last week’s session. “Businesses and individuals need to know what the tax is going to be in the beginning of the year so that they can plan and take advantage of incentives rather than waiting until the last two weeks of the year when the Congress may or may not act.” A full transcript of the session is available here.
Every time the R&D Credit comes up for renewal, a similar debate emerges. Proponents remind us that the tax break spurs innovation and supports high-paying jobs in science and technology. They call for a permanent R&D Credit, so that research-minded businesses can budget accordingly. Detractors point out that the last two-year extension cost $14 billion over ten years, and that making the credit permanent could cost $150 billion over ten years. They argue that nobody has figured out how to pay for a $150 billion loss in tax revenue.
But this time around, things started looking different. In 2010, President Obama announced that he would seek to permanently extend the R&D Credit. The presidential push for a permanent tax break reached its peak in January 2014 during his State of the Union Address:
“Listen, China and Europe aren't standing on the sidelines; and neither—neither should we. We know that the nation that goes all-in on innovation today will own the global economy tomorrow. This is an edge America cannot surrender. Federally-funded research helped lead to the ideas and inventions behind Google and smartphones. And that's why Congress should undo the damage done by last year's cuts to basic research so we can unleash the next great American discovery.”
Then in May 2014, it finally happened. The House of Representatives passed a bill to permanently extend the R&D Credit. Rumor has it that, for a short while, the bill enjoyed a degree of bipartisan support. Research firms were thrilled. A permanent R&D Credit would have meant that businesses invested in science and technology could lay out their budgets without having to wonder when (or if) they would get their tax breaks. And errors in earning reports that led to stock fluctuations—partially due to confusion over the R&D Credit’s odd cycle of expirations and renewals—may have diminished, or vanished entirely.
And then everything came crumbling down. The White House threatened a veto if Congress didn’t find a way to pay for the $150 billion bill, House Republicans took a shot at unemployment benefits and Senate members (who, perhaps, saw the writing on the wall) began to draft a bill to extend the R&D Credit temporarily.
Now that the dust has settled, it looks like we’re only getting a one-year extension out of the whole kerfuffle. This is disappointing news for science and scientific research. It’s also a little bit frustrating. Here we have a case where everyone—Republicans, Democrats, Congressmen and the White House all claimed to want the same thing. In the end, nobody got what they wanted.
For more on the implications of the R&D Credit extension, check out David Malakoff’s in-depth coverage in Science Magazine.