Floor Statement - Research and Experiment Tax Credit

Statement of Sen. Orrin G. Hatch At the Press Conference on:
Introduction of the Research & Experiment Tax Credit

Mr. President, today I am proud to introduce a bill to make the current tax credit for increasing research activities permanent with my friend and colleague Max Baucus. We are also joined by Senators D'Amato, Abraham, Boxer, Bingaman, Moseley-Braun, Dorgan, Murray, Define, Conrad, Rockefeller. Companion legislation will be introduced today by Representatives Nancy Johnson and Robert Matsui in the House. The Small Business Job Protection Act of 1996 temporarily extended this tax credit until May 31, 1997, when it is set to expire.

As the United States is shifting from an industrial based economy to an information and technology based economy, conducting research for tomorrow's products and methods is increasing in importance. In 1981, the Reagan Administration and the Congress recognized this need, and the credit for increasing research and experimentation (R&E) activities was first enacted. Unfortunately, the credit has been victim to repeated short term extensions that included a break in the availability of the credit.

Mr. President, this nation is the world's undisputed leader in technological innovation. American know-how has given our nation benefits undreamed of a few years ago. Research and development by U.S. companies has led the way in delivering these benefits, which enhance U.S. competitiveness as well as the quality of life for everyone. And, as the pace of change in our world quickens, the role of research has taken on increased importance. Today, the credit is needed more than ever to keep up with our changing world.

The R&E credit has played a key role in placing the United States ahead of its competition in developing and marketing new products. Studies of the credit indicate that the marginal effect of one dollar of the R&E credit stimulates approximately one dollar of additional private research and development spending over the short-run, and as much as two dollars of extra investment in research over the long-run.

Mr. President, the benefits of the R&E credit, though certainly very significant, have been limited by the fact that the credit has been temporary. In many fields, particularly pharmaceuticals and biotechnology, there are relatively long periods of development. The more uncertain the long-term future of the R&E credit is, the smaller the potential of the credit to stimulate increased research. This only makes sense, Mr. President. U.S. companies are managed by prudent business men and women. They evaluate their research and development investments by comparing the present value of the expected cash flows from the research over the life of the investment with the initial cash outlay. These estimates take into account the potential availability of tax credits. However, because of the uncertainty of a tax credit that has been allowed to continually expire, many decision makers do not count on the R&E credit as being available in the long-run. This, of course, means that fewer research projects will meet the threshold of viability and results in fewer dollars being spent on research in this country.

In the business community, the development of new products, technologies, drugs, and ideas can result in either success or failure. Investments carry a risk. If a project has a high risk of failure, the R&E tax credit will help ease the cost of taking the chance to find the cure for killer diseases such as cancer, to build the next microchip, or the next generation of heart monitoring equipment that can save lives. If the project becomes a success, resulting in a new drug that can cure a disease or a new breakthrough technology, then what happens? Additional investment is made, workers are hired, new jobs are created and many Americans benefit from the initial research and experimentation. In this way, all Americans can benefit from the R&E tax credit.

Mr. President, a small investment in R&E today produces dividends and rewards tomorrow. This tax credit is a credit for investment, for economic growth, and for creating new jobs. What if we don't act? As the Peat Marwick study confirms, the benefits of the R&E tax credit reach into the future. Failure to extend the credit beyond May 31, 1997 will weaken our Nation's ability to stay competitive in the future.

It is important to note that while U.S. investment in research and development has generally grown since 1970, our international competitors have not stood still. Other nations, such as Japan and Germany are constantly knocking at the door trying to build the better car, the faster computer, or the more effective drug. Uncertainty, about the future of the credit will make firms hesitant to make long-term commitments and investments in the critical long-term research projects that really are the source of the breakthrough drugs and the new technologies. In fact, U.S. non-defense R&D, as a percentage of Gross Domestic Product (GDP), has been relatively flat since 1985, while Japan's and Germany's have grown.

Unlike a few years ago, it is now not always necessary for U.S. firms to perform their research activities within the boundaries of the United States. As more nations have joined the U.S. as high tech manufacturing centers, with educated workforces, multinational companies have found that moving manufacturing functions overseas is sometimes necessary to stay competitive. The same is often true with basic research activities. In fact, some of our major trading partners now provide generous tax incentives for research and development conducted in those nations. These incentives are more attractive than the R&E credit the U.S. provides, particularly when the temporary nature of our credit is considered. Therefore, Mr. President, we are at risk of having some of the R&D spending in the U.S. transferred overseas if we do not keep competitive.

President Clinton, when campaigning for the presidency in 1992, recognized the importance of stimulating private R&D investment and called for a permanent R&E credit. The 1993 tax bill had a three year extension. Last year, we extended the credit for only one year because of revenue constraints in the Small Business bill. The President's fiscal year 1998 budget contains another one year extension. These proposals for extensions are well and good, Mr. President, but they do nothing to give stability to risky, long-term research and experimentation investments. The certainty of the availability of the tax credit is now almost as important as the credit itself. It might well make the difference between a decision to undertake an expensive multiyear research project and a decision to forego such research.

I hope this year we can put our support behind investment in research and make this credit permanent.

Mr. President, my home state of Utah is home to a large number of innovative companies who invest a high percentage of their revenue in research and development activities. For example, between Salt Lake City and Provo lies the world's biggest stretch of software and computer engineering firms. This area, which was named "Software Valley" by Business Week, is second only to California's Silicon Valley as a thriving high technology commercial area.

In addition, Utah is home to about 700 biotechnology and biomedical firms that employ nearly 9,000 workers. These companies were conceived in research and development and will not survive, much less grow, without continuously conducting R&D activities.

In all, Mr. President, there are approximately 80,000 employees working in Utah's 1,400 plus and growing technology based companies. Research and development is the lifeblood of these firms, and hundreds of thousands more throughout the nation that are like them. A permanent and effective tax incentive to increase research is essential to the long-term health of these businesses.

I am aware, Mr. President, that not every company that incurs R&D expenditures in the U.S. can take advantage of the R&E credit. As the credit matures and business cycles change, the current credit can be out of reach for some companies. Thus, as part of the latest extension of the credit Congress enacted an elective alternative credit to broaden the reach of this incentive. However, Congress should continue to examine ways to improve it and to make the credit more effective in delivering incentives to increase R&D activity.

In the meantime, however, it is important that this Congress send a strong signal that the current credit should not be allowed to expire. I urge my colleagues to show their support for the concept of a permanent R&E credit by cosponsoring this legislation and support the kind of research activities that will maintain American leadership in the technological developments that will lead us into the next century.

I ask unanimous consent that the text of the bill be printed in the Record following my remarks.