Making the R&D Tax Credit Permanent

Chad Moutray

When making long-term investments, either on physical capital or for research and development, businesses need certainty from Washington.  When President Obama signed the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (H.R. 4853) on December 17, 2010, among its many provisions, he reauthorized the Research & Experimentation Tax Credit, which is more commonly known as the R&D tax credit.  This tax credit was allowed to expire on December 31, 2009, leaving U.S. firms in doubt for nearly one year about its extension.  When it was renewed (for the 14th time since its initial creation in 1981), it was done so retroactively for all of 2010 and 2011.  Moving forward, there is a bipartisan push to make the R&D tax credit permanent and for increasing the size of credit, incentivizing businesses to innovate without worry about tax changes down the line.

At the heart of this debate has been research on the effectiveness of the credit in spurring new innovation and providing a lift to the economy.  A White House fact sheet states that “80 percent of the benefit directly supports jobs in the United States, and every dollar spent encourages U.S. based investment.”  In addition, a study last year by the Information Technology & Innovation Foundation (ITIF) found the following:

ITIF estimates that expanding the Alternative Simplified Credit (ASC) from 14 percent to 20 percent would spur job creation of 162,000 jobs in the short run and an additional, but unspecified, number of jobs in the longer run.  … it would not only give a quick short in the arm to job creation, but it would also boost innovation and U.S. economic competitiveness, thus laying the groundwork for longer-term prosperity.  ITIF estimates that this expansion of the credit would lead to an increase in annual GDP by $66 billion, an increase in the number of patents to American inventors by 3,850, and by year 15 produces net revenue gains for the Federal treasury.

This same study shows how other countries have studied the benefits of our experiences with the R&D tax credit, and more recently, they have become more competitive than the U.S. in luring innovation overseas. 

In his FY 2012 budget, the President states that the U.S. currently ranks 24th out of 38 countries for our R&D tax credit, and he says, “the Administration wants to expand the credit by about 20 percent, the largest increase in the credit’s history, and simplify it so that it is easier for firms to take this credit and make the investments our economy needs to compete.”  A 20 percent increase in the R&D tax credit would mean the Alternative Simplified Credit would go from 14 to nearly 17 percent would still leave the U.S. behind many of our global competitors, according to ITIF.  Nonetheless, it puts the President on record supporting both permanency and a larger R&D tax credit, winning him support in the business community. 

For their part, business groups have lined up support for the “American Research and Competitiveness Act of 2011” (H.R. 942), which does make the R&D tax credit permanent and increase it from 14 to 20 percent.  This bill was introduced by Rep. Kevin Brady (R-TX), who sits on the House Ways and Means Committee, and has bipartisan support.  In his press release, Congressman Brady says, “To keep from falling behind our global competitors and to make sure America is the first choice for R&D jobs, we need to modernize the tax credit, strengthen it to encourage companies to make greater investment in research and jobs and make the credit permanent so businesses have the confidence to make long-term investment decisions here in the United States.” 

To help support this bill, the R&D Credit Coalition has issued some talking points which says it will “provide a stable and predictable, permanent research incentive for research in the U.S.”   It also cites a study from Ernst & Young which observed that 28 percent of North American companies will invest in R&D in emerging markets in five years, illustrating the competitive landscape for R&D and the need to bring more of those dollars back to the United States.  The National Association of Manufacturers adds, “R&D activities by manufacturers typically span 5-10 years.  A strengthened and permanent credit would assure U.S. companies that the credit would be available during the life of the R&D project.”

Indeed, a host of large companies have come out in favor of the bill, but it also has received support from smaller entrepreneurs.  The Association for Competitive Technology (whose tagline is “Protecting Small Business Innovation”) writes that this bill “is exactly what is needed to encourage more R&D investment and growth in job creating industries.  If Congress is serious about economic recovery and job creation, this is an easy measure to support.”

The current extension expires December 31, 2011, along with a number of other tax expenditure programs.  Given the budgetary situation, all of these tax breaks will be looked at carefully.   But, given the bipartisan consensus and mobilizing around this issue, the prospect of making the R&D tax credit permanent appears to be gaining momentum. 

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