Think tank calls for expansion of R&D tax credit

The US Congress should not only make a research and development tax credit permanent, but it should also significantly expand the programme, a technology-focused think tank said.

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A think tank has called on the US Congress to make a research and development tax credit permanent and expand the programme, echoing demands for better government support for R&D in the UK

The Information Technology and Innovation Foundation (ITIF), called on Congress to double the tax credit, from 20% of qualified R&D expenses to 40%. Congress should also make the tax credit permanent, the think tank said, reinforcing similar calls from technology trade groups and vendors.

"The R&D credit... is an important tool for boosting innovation and competitiveness and creating higher wage jobs," Robert Atkinson, the report's author and ITIF president, wrote. "Growth in the 21st century is driven in large part by innovation, much of it born of investments in research."

The US calls echo frustration voiced by the UK IT industry in the wake of last month's Budget. Chancellor Gordon Brown announced a 5% increase in the UK's R&D tax credit. But IT suppliers’ body Intellect warned that the increase was not enough.

Brown’s Budget increased the large company R&D tax credit from 125% to 130%, beginning in April next year. But Intellect said the increase would amount to around half a percentage point in real terms. Intellect figures suggest that only around half the elements in R&D projects are eligible for tax credits, while the Budget cut in corporation tax would further lessen the tax credit's impact.

Congress has temporarily extended the US R&D tax credit 11 times since 1981, and it has expired twice, but lawmakers have been reluctant to make the tax credit permanent partly because of its cost -- about £3.5m a year. Some groups, including tax reform advocates Citizens for Tax Justice, have called the R&D tax credit "corporate welfare."

But technology groups have argued the piecemeal approach to the credit makes it difficult for companies to plan their R&D budgets.

"The uncertainty over the credit's existence adds risk to the already risky research investments made by companies and it reduces its effectiveness," Atkinson wrote. "Relative to the increased productivity, innovation and overall growth that a more generous R&D tax credit would bring, the benefits of modestly lower interest rates that a small budget deficit might bring would be minimal."

In the late 1980s, the US had the "most generous" treatment of R&D expenses among the 30 nations that are members of the Organisation for Economic Co-operation and Development (OECD), Atkinson said. But by 2004, the US had fallen to 17th, according to OECD statistics. Atkinson's proposals would move the US up to about sixth among OECD countries, he said.

In addition to making the credit permanent and expanding the credit percentage, Atkinson called on Congress to expand an alternative credit programme, to create a 40% credit for collaborative research companies do with other firms or universities, and to speed up the depreciation schedule for R&D equipment.

Atkinson's report also addresses arguments against an expanded tax credit. Addressing criticisms that the tax credit amounts to a subsidy for large businesses, Atkinson said the benefits to the US economy overall are significant.

"By encouraging greater public and private investments in research, government policy can play an important role in spurring economic growth and enhancing US competitiveness," he wrote. "The time has come... for a significant expansion of the credit to help the United States meet the new global competition."

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