[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
                            SUBCOMMITTEE ON 
                       CONTRACTING AND TECHNOLOGY 
                   HEARING ON HELPING SMALL BUSINESS 
                    INNOVATORS THROUGH THE RESEARCH 
                     AND EXPERIMENTATION TAX CREDIT 

=======================================================================

                                HEARING

                               before the


                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                              July 9, 2009

                               __________

                   [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]                               

            Small Business Committee Document Number 111-035

Available via the GPO Website: http://www.access.gpo.gov/congress/house

                               ----------
                         U.S. GOVERNMENT PRINTING OFFICE 

50-947 PDF                       WASHINGTON : 2009 

For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
DC area (202) 512-1800 Fax: (202) 512-2250 Mail: Stop SSOP, 
Washington, DC 20402-0001 
















                   HOUSE COMMITTEE ON SMALL BUSINESS

                NYDIA M. VELAZQUEZ, New York, Chairwoman

                          DENNIS MOORE, Kansas

                      HEATH SHULER, North Carolina

                     KATHY DAHLKEMPER, Pennsylvania

                         KURT SCHRADER, Oregon

                        ANN KIRKPATRICK, Arizona

                          GLENN NYE, Virginia

                         MICHAEL MICHAUD, Maine

                         MELISSA BEAN, Illinois

                         DAN LIPINSKI, Illinois

                      JASON ALTMIRE, Pennsylvania

                        YVETTE CLARKE, New York

                        BRAD ELLSWORTH, Indiana

                        JOE SESTAK, Pennsylvania

                         BOBBY BRIGHT, Alabama

                        PARKER GRIFFITH, Alabama

                      DEBORAH HALVORSON, Illinois

                  SAM GRAVES, Missouri, Ranking Member

                      ROSCOE G. BARTLETT, Maryland

                         W. TODD AKIN, Missouri

                            STEVE KING, Iowa

                     LYNN A. WESTMORELAND, Georgia

                          LOUIE GOHMERT, Texas

                         MARY FALLIN, Oklahoma

                         VERN BUCHANAN, Florida

                      BLAINE LUETKEMEYER, Missouri

                         AARON SCHOCK, Illinois

                      GLENN THOMPSON, Pennsylvania

                         MIKE COFFMAN, Colorado

                  Michael Day, Majority Staff Director

                 Adam Minehardt, Deputy Staff Director

                      Tim Slattery, Chief Counsel

                  Karen Haas, Minority Staff Director

        .........................................................

                                  (ii)




                         STANDING SUBCOMMITTEE

                                 ______

               Subcommittee on Contracting and Technology

                     GLENN NYE, Virginia, Chairman


YVETTE CLARKE, New York              AARON SCHOCK, Illinois, Ranking
BRAD ELLSWORTH, Indiana              ROSCOE BARTLETT, Maryland
KURT SCHRADER, Oregon                TODD AKIN, Missouri
DEBORAH HALVORSON, Illinois          MARY FALLIN, Oklahoma
MELISSA BEAN, Illinois               GLENN THOMPSON, Pennsylvania
JOE SESTAK, Pennsylvania
PARKER GRIFFITH, Alabama

                                 (iii)

  










                            C O N T E N T S

                               __________

                           OPENING STATEMENTS

                                                                   Page

Nye, Hon. Glenn..................................................     1
Schock, Hon. Aaron...............................................     3

                               WITNESSES

Heenan, Mr. Bart, Chief Executive Officer, Morphix Technologies, 
  Virginia Beach, VA.............................................     4
Ferros, Mr. Scott, Chief Financial Officer, Blackhawk!, Norfolk, 
  VA.............................................................     6
Wilson, Mr. Doug, Executive Vice President, LifeNet Health, 
  Virginia Beach, VA.............................................     8
Schoenbach, Dr. Karl, Frank Reidy Research Center for 
  Bioelectrics, Old Dominion University, Norfolk, VA.............     9
Barrett, Mr. Ned, President, Direct Logic Solutions, Peoria, IL..    11
Bendis, Mr. Richard, President & Chief Executive Officer, 
  Innovation America, Philadelphia, PA...........................    13

                                APPENDIX


Prepared Statements:
Nye, Hon. Glenn..................................................    20
Schock, Hon. Aaron...............................................    22
Heenan, Mr. Bart, Chief Executive Officer, Morphix Technologies, 
  Virginia Beach, VA.............................................    24
Ferros, Mr. Scott, Chief Financial Officer, Blackhawk!, Norfolk, 
  VA.............................................................    29
Wilson, Mr. Doug, Executive Vice President, LifeNet Health, 
  Virginia Beach, VA.............................................    36
Schoenbach, Dr. Karl, Frank Reidy Research Center for 
  Bioelectrics, Old Dominion University, Norfolk, VA.............    39
Barrett, Mr. Ned, President, Direct Logic Solutions, Peoria, IL..    41
Bendis, Mr. Richard, President & Chief Executive Officer, 
  Innovation America, Philadelphia, PA...........................    44

                                  (v)

  


                            SUBCOMMITTEE ON
                   CONTRACTING AND TECHNOLOGY HEARING
                       ON HELPING SMALL BUSINESS
                    INNOVATORS THROUGH THE RESEARCH
                     AND EXPERIMENTATION TAX CREDIT

                              ----------                              


                         Thursday, July 9, 2009

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:10 a.m., in 
Room 2360, Rayburn House Office Building, Hon. Glenn Nye 
[chairman of the Subcommittee] presiding.
    Present: Representatives Nye and Schock.
    Chairman Nye. Good morning. Let me just go ahead and open 
this hearing. I am going to start with an apology. We are going 
to have votes relatively soon and so we are going to be 
interrupted. We are going to get as far as we can through the 
opening statements and then we will have to go vote, and then I 
will get us back and start us right as soon as we get through 
the first cycle of votes. Again, so apologies ahead of time. I 
am going to ask for a little bit of patience today, but we will 
get everybody a chance to say what they need to say.
    I want to go ahead by just starting with an opening 
statement. And again, welcome to all our panelists today.
    Yesterday afternoon, the House voted on legislation to 
strengthen the SBA's small business innovation programs. And in 
debating that bill, the same two themes kept coming up over and 
over again, job creation and economic growth. Those are areas 
in which our country has traditionally excelled, thanks largely 
to an emphasis on research and development. And today, even as 
our economy moves towards recovery, we need to be focused on 
the kind of innovation that can unlock new markets and create 
new jobs. The Research and Experimentation Tax Credit, commonly 
known as the R&D tax credit is a tested means for doing just 
that.
    Targeted tax relief is an important tool for encouraging 
small business growth and also an effective catalyst for 
innovation. In the past, the R&D tax credit has encouraged 
countless entrepreneurs to test the waters of innovation. And 
today we are going to look at that incentive and evaluate its 
role in strengthening small firms.
    Any investment in small business R&D goes a long way. That 
is because entrepreneurs are already more inventive than their 
larger competitors. Small firms produce 13 times as many 
patents as big businesses, and have a history of pioneering new 
markets. We can remember the tech boom in the 1990s wasn't a 
corporate success story as much as a small business revolution, 
one that saw the rise of lucrative new industries, such as on-
line advertising. But we must also remember that innovation 
isn't just about developing the latest technology, it is about 
creating jobs.
    70 percent of R&D credit dollars go to high wage positions 
for researchers, scientists and engineers. Because small firms 
employ nearly 40 percent of these professionals, it is safe to 
say that R&D job growth is small business job growth. And with 
unemployment now hovering at 9-1/2 percent, we need every job 
we can get. Incentives for innovation are an important means 
for keeping current workers on payroll and putting unemployed 
Americans back to work. They also make good economic sense. 
According to one study, every dollar in R&D tax credits yields 
another $2 in research.
    Clearly, this credit is doing a great deal of good for our 
economy. And yet, despite its obvious benefits, there is 
concern that it is not accomplishing as much as it could for 
entrepreneurs. That is a real issues because roughly 40 percent 
of the businesses that claim this credit are small firms.
    Perhaps the greatest shortcoming in the R&D credit is its 
lack of permanence. In the nearly three decades since its 
inception, the incentive has never been cemented. Instead, it 
has been reauthorized 1 year at a time, often at the last 
minute, retroactively, and after the credit has expired. Now, 
if that sounds convoluted, it is because it is. And needless to 
say, these actions have added an element of uncertainty to an 
already risky R&D process. Making the tax credit permanent 
could mitigate that risk, giving entrepreneurs the stability 
they need to plan budgets and attract investment. Meanwhile, a 
move to unravel some of the credits complexity could also be a 
big help. By simplifying the process, we could cut down on 
paperwork and ease compliance costs. Doing so would likely 
encourage more small firms to participate in R&D, helping them 
to develop more new products and create more new jobs.
    Kitco Fiber Optics, a business based in my district, who 
unfortunately could not make it here today, is just one example 
of a small business which qualifies for the R&D tax credit, yet 
does not receive the credit. The president and CEO of KITCO, 
Geoff Clark, has told me that due to the uncertain nature of 
the current legislation, his business has not made the initial 
investment to hire accountant who specializes in R&D tax credit 
dealings to go through their accounting books in order to 
determine what would qualify for this credit. And my hope is 
that taking action to both simplify and make permanent the R&D 
tax credit would encourage KITCO and other small businesses to 
use the incentive to increase their growth and productivity.
    The strength of our economy has always been driven by the 
innovation and hard work of our small entrepreneurs, and as we 
work to create jobs and get our economy moving again, we must 
once again look to small business to lead the way.
    By strengthening the R&D tax credit, and cutting taxes for 
small businesses, we can give our most inventive firms the 
tools they need to innovate and grow. And most importantly, as 
we face increased competition from abroad, continued investment 
in R&D will help us retain our standing as home to the world's 
greatest technological advances.
    I would now like to thank today's witnesses in advance for 
their testimony. I know that we are all looking forward to 
hearing from them.
    And with that, I would like to go ahead and recognize our 
committee ranking member, Mr. Schock, for any opening statement 
that he might have. And again, apologies for the fact that we 
will have to break to go vote relatively soon. But we will see 
how much we can get done before that. Mr. Schock.
    [The statement of Mr. Nye is included in the appendix.]
    Mr. Schock. Well, thank you Mr. Chairman. I apologize for 
my tardiness. We have had, as you know, a very busy morning 
already and we will have a busy morning.
    So thank you to the witnesses who are here this morning and 
for Mr. Chairman, for holding this meeting to further study the 
impact of the research experiment or the, what we call the R&D 
tax credit, and what effect it is having on our Nation's small 
businesses.
    I would also like to thank each one of our witnesses for 
having taken the time to provide this committee with their 
testimony and travel all the way to Washington here today.
    The R&D tax credit has been available for businesses large 
and small for over 20 years. And during that period, tens of 
thousands of companies have used this important provision of 
the Tax Code to help reinvest and grow their businesses, 
encouraging more American ingenuity and domestic jobs.
    Now, more than ever, we must be focused on providing 
appropriate incentives to those companies, which will help grow 
our economy and make a sustained commitment to conducting long 
term, high cost research right here in the United States.
    The R&D tax credit is positive motivation for U.S. 
investment, innovation and something which will help to 
contribute to a stronger economy and a higher standard of 
living for American workers. Simply put, the R&D tax credit 
stimulates immediate business investment decisions with long 
term benefits to the U.S. economy.
    Since the R&D credit is only available for research 
performed in the United States, it remains a job creator that 
cannot be exported. As such, the credit is certainly needed, 
especially as foreign governments continue to actively recruit 
American companies to base research operations at a low cost 
option abroad.
    Regrettably, Congress has repeatedly failed to provide long 
term insight to extend this credit beyond just a few short 
years. The fact that the R&D credit has proven itself popular 
enough to be extended 13 times is all the evidence this 
Congress needs to know that we should stop playing games and 
make the credit permanent.
    Again, the R&D tax credit is scheduled to expire at the end 
of this year, and, again, small businesses are being pushed 
into a scenario where saving proves wiser than investing for 
growth due to the lack of certainty of the continued extension 
of this credit. With such confusion, businesses are unable to 
factor the full benefits of the R&D credit into their research 
budgets, long term commitments and their capital needs.
    The bottom line is that either a longer extension or 
permanency of the R&D tax credit would create and help high 
paying U.S. jobs and allow for better planning by our Nation's 
business. I am optimistic that today we will hear from those 
small businesses that are directly affected by this tax credit. 
I look forward to hearing all of you regarding the necessity of 
R&D tax credit, as well as specific changes so that we can 
continue to incentivize the risk-taking entrepreneurship and 
investment necessary to grow our economy and create good paying 
American jobs.
    I yield back, Mr. Chairman.
    Chairman Nye. Thank you, Mr. Schock. I am going to go ahead 
and introduce the panel members one by one. We are going to ask 
you to try to get your remarks into the 5-minute window, if you 
can. And you will notice in front of you a set of lights which 
will be green for 4 minutes, yellow for the final minute, and 
then will turn red when 5 minutes is up. If we get to the end, 
we would ask you to try to go ahead and conclude as quickly as 
you can.
    I want to start by introducing Mr. Heenan, CEO of Morphix 
Technologies, based in Virginia Beach, Virginia. As the CEO, 
Mr. Heenan leads the strategic direction and day-to-day 
operations of the company.
    Morphix Technologies provides innovative gas detection 
products to military, first response, and industrial users 
throughout the world. And again, thank you for being with us 
today. Mr. Heenan, you are recognized.

                    STATEMENT OF BART HEENAN

    Mr. Heenan. Thank you, Chairman Nye and Ranking Member 
Schock.
    Good morning. It is my pleasure to be here. And I 
appreciate your leadership on this important issue to small 
technology businesses.
    Morphix Technologies was formed in 1995. We make chemical 
detection products that have the potential to save lives for 
military, for first responders and for industrial workers. Our 
niche is providing low cost, rugged, easy to use chemical 
detection devices that your average cop, your average 18-year 
old who goes and volunteers to serve in our military can use 
with minimal training. We now employ 35 people, 15 of whom are 
scientists and engineers, five of them have Ph.Ds.
    As a business person, I am really not in a position to 
recommend policy. However, I would like to share with you some 
of my thoughts of the practical implications and practical 
issues I see with the R&D tax credit. Clearly, as you have 
already stated, the R&D tax credit has a big impact on 
America's competitiveness, can have a big impact on job 
creation.
    At Morphix, 85 percent of our R&D is labor cost. And those 
are good paying jobs. A well functioning R&D tax credit, I 
think, can help small businesses maybe increase their science 
staff by five to 10 percent. However, the companies need to 
believe in the R&D tax credit.
    Frankly, at Morphix, we don't have that confidence in the 
R&D tax credit on a regular basis, so we haven't gone out and 
hired that additional scientist or additional engineer that we 
might otherwise hire from the R&D tax credit, and there are 
three main reasons for that that I would like to share with 
you.
    The first both of you have already addressed and that is 
the permanence issue. That impacts all companies participating 
in the R&D tax credit, so I am not going to discuss that any 
further. You have already discussed that very well.
    The second and third issue are both, I think, very specific 
to small companies. And the first of those is that there is a 
significant administrative burden for small companies to be 
able to take advantage of the R&D tax credit. That 
administrative burden is not just going out and hiring a tax 
accountant, but it is having the accounting systems in place 
that allow you to do what you need do to comply to the IRS 
regulations. Most large companies have those accounting systems 
in place.
    In my experience, most small companies do not. So it is not 
just an investment once a year in a tax accountant. It is 
actually a big investment of changing the infrastructure of the 
company, and that is a very, very difficult issue for many 
small companies.
    The next and last issue I would like to highlight is 
probably the one that is most important to me personally, and 
that is the impact of the alternative minimum tax or AMT 
relative to the R&D tax credit. This issue is really, I think, 
pretty simple, and that is that many small businesses, 
including mine, are taxed through the individuals' income tax, 
not through a corporate income tax. Large companies are often 
taxed through corporate income tax, small companies more 
through individual tax.
    If the individual owners, the business owners, who are 
being taxed through their individual tax return are subject to 
the AMT, they are not allowed to take the R&D tax credit. As a 
result, I think many business owners feel that it is not worth 
the effort to go after the R&D tax credit because they are not 
really going to get the result.
    Let me give you an example, my personal example. At 
Morphix, we have spent well over a million dollars in R&D over 
the last 3 to 4 years. My share of the taxes we have paid for 
income and employment taxes has been in the hundreds of 
thousands of dollars, and I have personally been able to take 
$138 in R&D tax credit over that time period. That is really 
not much of an incentive to go and do something that is going 
to employ the people and do the things that the R&D tax credit 
is intended to do.
    In summary, I fully support the R&D tax credit. I think it 
is a powerful engine for employment growth, a powerful engine 
for competitiveness of the country. For the reasons I outlined 
above, I believe that small technology businesses are generally 
not fully utilizing the tax benefit to their full advantage. 
And of course, if companies aren't taking the R&D tax credit, 
then it is not achieving its economic and social benefits that 
it is intended to take.
    I would ask the committee to consider three things: One, 
make it permanent, two, simplify the administrative burden for 
small businesses, and three, try to address the AMT issue 
relative to the R&D tax credit.
    Thank you for your time.
    Chairman Nye. Thank you, Mr. Heenan.
    [The statement of Mr. Heenan is included in the appendix.]
    Chairman Nye. I would now like to introduce Mr. Ferros. Mr. 
Scott Ferros, Chief Financial Officer for Blackhawk, located in 
Norfolk, Virginia.
    Blackhawk was founded in 1995 by a former U.S. Navy SEAL, 
Mike Knoll. The company is recognized as a world leader in 
supplying tactical equipment to the military and law 
enforcement markets.
    Mr. Ferros.


                   STATEMENT OF SCOTT FERROS

    Mr. Ferros. Chairman Nye, Ranking Member Schock, and the 
distinguished members of the Contracting and Technology 
Subcommittee of the House Small Business Committee, happy to be 
here today.
    Again, my name is Scott Ferros. I am the Vice President and 
Chief Financial Officer for Blackhawk in Norfolk, Virginia, 
based veteran owned small business. Thank you again for 
allowing me the opportunity to share my views on the merits of 
the research and experimentation tax credit.
    As a certified public accountant with over 30 years of 
varied public accounting and industry experience and the chief 
financial officer of a highly innovative small business, I feel 
somewhat uniquely qualified to convey to you some of my 
observations on the R&D credit.
    As I am sure you already know, which I have experienced 
time and time again, tax policy does significantly influence 
taxpayer behavior. With respect to the R&D credit, I believe 
the economics of the credit stimulate product innovation 
related spending. However, the ongoing temporary nature of the 
legislation, along with administrative complexities of the 
program, do create an uncertainty for all users; and there is a 
punitive cost to compliance issue that will limit the use for 
very small businesses.
    As we meet here today, I would like you to consider a 
couple of simple recommendations. First, recognize the economic 
benefits most companies do derive from the program; second, 
make the R&D credit permanent law; and third, work to simplify 
the compliance process.
    Blackhawk is a 16-year old company with a history of 
developing new and innovative product solutions which we 
believe enhance the effectiveness and safety of our primary end 
users, the warfighter and the law enforcement officer. It is 
our collective opinion at Blackhawk that the economic benefits 
of the R&D credit allowed under the Internal Revenue code have 
helped enable our company to grow from a very small 
entrepreneurial run business to a product development driven 
organization that now employs over 300 people throughout the 
United States and sells thousands of products to military and 
law enforcement professionals on a global basis.
    Blackhawk has utilized the R&E credit since 1999. During 
this 10-year period, the company has successfully developed 
several hundred new products and increased payroll related 
research and experimentation expense from approximately 
$200,000 in 1999 to over $5 million in 2008. During that time, 
while credits increased from roughly 15 to over $300,000 last 
year, the gross revenue, subject to Federal and State tax, grew 
ten-fold. Much of this increase that we have experienced has 
been driven by new products introduced as a result of the R&D 
process, which leads us to believe that the payback to the 
government far surpasses the cost of the program.
    While the benefits of the program appear clear, the 
temporary nature of the credit has caused uncertainty, and the 
compliance complexities have created barriers of entry in a 
cottage industry supporting the compliance.
    The R&E credit was originally enacted as part of the 1981 
Economic Recovery Tax Act, and has been revised and amended in 
the years since through many updated tax acts, but remains 
still temporary. The continuance of the credit is a frequent 
topic of discussion and speculation between businesses, tax 
advisers, Members of Congress, and the Department of Treasury, 
creating an air of uncertainty for all parties involved.
    We believe that making the credit permanent would encourage 
more companies to use this credit and, therefore, stimulate 
research.
    Finally, the tax credit and the expenses are addressed in 
Internal Revenue Code sections 41 and 174, as well as the 
corresponding regulations. The source of the law is well over 
100 pages in length, which does not include the thousands of 
court cases and other rulings pertaining to the same topic. An 
editorial discussion by the Bureau of National Affairs is 
nearly 300 pages in length, as evidenced by the massive volume 
of law compliance and access to the credit is extremely 
difficult. The complexity has given rise to a cottage industry 
of tax advisers who specialize exclusively in quantifying and 
reporting the credit.
    In our case, we justify the compliance and consulting costs 
to report the credit. However, quite, frankly the professional 
services associated with this credit are expensive and, I 
believe, prevent smaller entrepreneurs from benefiting.
    At Blackhawk, we have a well organized and disciplined R&D 
division with remarkable employees and distinct financial 
reporting. Even with this unique organization, we are required 
to produce contemporaneous documentation to support our 
activities for the sole purpose of qualifying for the credit. 
And while we have sufficient size to benefit from the credit, 
it is not always the case, and it was very difficult when we 
were a small company.
    We believe there are many barriers that prevent smaller and 
younger companies from claiming this credit, not the least of 
which are the complexities, the compliance costs, the 
Alternative Minimum Tax and the net operating loss limitations.
    So, Mr. Chairman, and members of the committee, we strongly 
recommend that easing these barriers will permit more and 
smaller companies to claim the credit and drive the innovation 
within the United States.
    This concludes my prepared statement. And again, thank you 
for the opportunity to testify to the committee today. And I 
look forward to answering any of your questions.
    Chairman Nye. Thank you Mr. Ferros.
    [The statement of Mr. Ferros is included in the appendix.]
    Chairman Nye. Mr. Schock, if you don't have any opposition, 
I am going to go ahead and invite Mr. Wilson. I think we have 
time to get one more person's opening statement before we will 
have to go take some votes.
    So Mr. Wilson, thank you for joining us today.
    Mr. Doug Wilson is the Executive Vice President of LifeNet 
Health in Virginia Beach, Virginia. LifeNet Health is a no 
profit organ procurement organization providing donation 
systems for heart, liver, kidney and other organs for 
transplant.
    And Mr. Wilson, thank you for joining us today. Please.

                    STATEMENT OF DOUG WILSON

    Mr. Wilson. Good morning, Congressman Nye, and Congressman 
Schock. Thank you for having us.
    Research has played a significant role in LifeNet Health's 
past, and it will play a significant role in our future.
    Today LifeNet Health is the largest nonprofit full service 
tissue provider in the United States. And since our formation 
in 1982, LifeNet Health has pioneered technologies through a 
strong and unwavering commitment to research designed to ensure 
safety in allograft screening, recovery, cleaning and delivery. 
Allograft tissue is tissue donated from the gift of tissue 
donation at the time of one's death. LifeNet Health processes 
this tissue into implants for surgeons to use in their patients 
who are suffering from a disease or a specific injury.
    Our innovative processes have been benchmarks in the 
industry. Allograft tissues are actually transplanted in nearly 
every hospital, every day, specifically, in orthopedics, trauma 
care, neurosurgery, cardiac surgery and vascular surgery.
    Key to today's hearing is the following: LifeNet Health 
works closely with many for profit companies, both in research 
as well as in the distribution phases of our product life 
cycles. In some cases we rely on them, and we will continue to 
rely on them for their capital investments through contractual 
programs and joint ventures for research into new bioimplant 
technologies leading to new and improved clinical products. In 
many cases, these companies provide LifeNet Health, a 
nonprofit, with the necessary capital to enhance our research 
and our production efforts, carry the products through the 
regulatory process, and the product development cycle.
    The research tax credit in its many forms can be a factor 
in the investment decision by our for profit partners. Most of 
our new products, particularly those emanating from 
regenerative medicine, are very long time horizon projects and 
they have high fixed costs. Thus, permanence of the tax credits 
could reduce the risk for the investment and distribution 
partner that we may solicit.
    Equally important, permanence provides an environment in 
which our for profit partners can plan and forecast with more 
confidence long term. The use of the tax credits allows 
LifeNet, through our partners, to have flexibility in the 
selection of projects and products to fund, especially those 
who have high social value and long term impact on our society.
    Future R&D will ensure better patient care and, more 
importantly, optimized economic options for hospitals which 
they need. LifeNet Health's commitment to safety and quality 
and patient outcome is evident in everything we do, including 
ongoing research and development efforts. We have more than 45 
patents that include cleaning technology which is the industry 
standard in tissue banking.
    As a result of our R&D work, LifeNet Health has distributed 
nearly 2 million allografts with no incidence of disease 
transmission linked to tissue screened and processed by 
LifeNet.
    As part of our ongoing commitment to bio-implants, LifeNet 
Health recently announced the LifeNet Health Regenerative 
Medicine Institute. The focus of the new institute will be to 
utilize our current technologies, coupled with the latest in 
stem cell and growth factor development, to yield new 
generations of more clinically effective implants. For these 
lofty projects going forward, LifeNet Health will surely 
establish alliances with for profit organizations for co-
development. The use of the permanent tax credit for research 
and development purposes by our potential alliance partners 
will, no doubt, allow us to move ahead in developing better 
therapies for patients in need and furthering our mission of 
saving lives.
    Thank you very much.
    Chairman Nye. Thank you, Mr. Wilson.
    [The statement of Mr. Wilson is included in the appendix.]
    Chairman Nye. I just want to check the clock here. All 
right. What I am going to do is I am going to adjourn the 
session until we have time to go take this vote. And I 
understand we have a series of votes to take that is going to 
eat up a little bit of time. I am not sure exactly how long it 
is going to take. I am hoping it will be less than an hour, but 
it will be a significant bit of time. So we are going to 
adjourn until we finish this round of votes. We will come right 
back as soon as it is over, and we will have the staff kind of 
keep you up to date on where we are and how long we think it 
will take. And again, apologize. But this is one thing that we 
as Members of Congress have to do when they tell us and 
personally. So again, thank you for being here. And we will 
adjourn temporarily, and then we will reconvene as soon as 
possible.
    [recess.]
    Chairman Nye. I am going to go ahead and bring this hearing 
back to order. Thank you. And apologizes for holding you here 
for so long. But I am glad you stayed. I think it is important 
that everyone here who spent the time to get here have a chance 
to be heard today on this important topic. So what I would like 
to go ahead and do is introduce our next panelist for his 
opening statement. Dr. Karl Schoenbach, a professor and eminent 
scholar from the Frank Reidy Research Center for Bioelectrics 
in Old Dominion University located in Norfolk, Virginia. The 
Frank Reidy Research Center works to develop medical 
diagnostics, therapeutics and environmental decontamination. 
Dr. Schoenbach, thank you for joining us.


                  STATEMENT OF KARL SCHOENBACH

    Mr. Schoenbach. Chairman Nye, thank you for inviting me. I 
am representing the Frank Reidy Research Center for 
Bioelectrics today. It is an interdisciplinary research center, 
and we have about 40 faculty, graduate students and technical 
staff. We focus on the study of biological effects of 
electrical pulses and try to develop new therapies based on 
these bioelectric effects. One of our major application is 
treatment of cancer. We are doing very well in basic research 
as shown by the funding which we get mainly from NIH and the 
Department of Defense, by a large number of publications, and 
by invited talks all over the world. We are less successful in 
transferring, however, our research to industry. Two examples. 
Already in 2002, we have shown that we can, with very short 
electrical pulses, kill cancer cells very effectively. And in 
2006 in animal experiments, we could demonstrate that we can 
eliminate melanoma tumors completely with these short pulses. 
We have tried since then, since 2006 and actually before that, 
to find companies who work with us to bring this technology to 
market. And we were only successful now, this year, to find a 
company who is willing to work with us.
    Another example is based again on research developed for 
the treatment of melanoma. In this case, we have developed an 
efficient method using electrical pulses to deliver genes 
directly into the tumors which then stimulate the immune system 
and destroy tumor cells. We could show that this therapeutic 
approach is not only effective in treating tumors locally, but 
it also prevents new tumor growth and it eliminates metastatic 
tumors.
    So even with these exciting results we were not able to get 
support from companies immediately. It took us 2 years to get 
support from a small business which helped us to get the 
equipment in place and financial support from a cancer center 
to do a phase one trial. And again, this gave us fantastic 
results. But we are still searching for companies to help us 
support a phase two trial.
    Again, because of limited availability of research dollars 
we have not been successful yet. In both cases, we lost 
valuable time which could have been used to bring our therapies 
to cancer patients. The problem is that the university research 
is still focused on basic research. It will only demonstrate 
feasibility in preclinical studies or early phase clinical 
studies and will seldom go towards for full development of 
therapies. This is considered to be the task of companies. 
Small companies, on the other hand, would understandably like 
to minimize risk when taking on new projects and would like to 
only take on "mature projects," projects which are only in a 
certain stage such that the risk is relatively small.
    So there is a gap between university research and research 
and development at small companies. Any incentive which helps 
to bridge this gap to lower this barrier is extremely important 
for university research, and tax incentives could be one of 
them. It would definitely help to get our research at the 
universities better to the market and faster to the market if 
this barrier would lower. Thank you.
    Chairman Nye. All right. Thank you very much, Dr. 
Schoenbach.
    [The statement of Mr. Schoenbach is included in the 
appendix.]
    Chairman Nye. I am going to--we are going to go on. I am 
going to actually invite our ranking member, Mr. Schock, to do 
the next introduction, as I believe our next panelist is 
someone who is from his area. So I will turn things over to Mr. 
Schock.
    Mr. Schock. Thank you, Mr. Chairman. Our next witness is 
Mr. Barrett, is that correct?
    Mr. Barrett. That is.
    Mr. Schock. All right. Mr. Ned Barrett is the President and 
chief operating officer of Direct Logic Solutions located in my 
home town of Peoria, Illinois. Direct Logic was founded in 1998 
and has grown substantially since then helping their clients 
with direct to consumer marketing. Direct Logic has a number of 
customers located in central Illinois and also around the 
country. They focus on marketing consultation, search engine 
optimization, marketing database construction, as well as sales 
forecasting. Ned has been with Direct Logic from the start, but 
before that ran a variety of other different business. I 
appreciate you making the trip here today and look forward to 
hearing the testimony before our committee. Welcome.

                    STATEMENT OF NED BARRETT

    Mr. Barrett. Ranking Member Schock, thank you, Chairman 
Nye, I appreciate it. I appreciate the opportunity to testify 
to the committee today. I am here to tell you that we support 
the continuation of an expansion of the R&D tax credit. Direct 
Logic employs 25 people and we specialize in interactive 
marketing which includes Web site development, as you 
mentioned, database construction, e-mail marketing, on-line 
promotions, social marketing to Facebook and Twitter and other 
advanced database marketing technologies. We are a small 
company, but we count many top firms as clients including 
Hasbro Toys, The Breeders Cup, Thoroughbred Horse Racing, TV 
Guide, Maui Jim Sunglasses, FTD Florists, BASF, the German 
chemical company and many others. I mention these clients 
because people are sometimes surprised that a firm from Peoria 
can compete with large agencies in New York, Los Angeles and 
Chicago to win such accounts.
    The reason we have the securities accounts is due to our 
superior products and services that are a result of our 
intensive research and development and our proprietary 
technologies. Our success is due in large part to our people. 
It used to be the top technology talent only migrated to large 
cities and technology hubs. Now that there is such a great 
ability for people to collaborate on line in real-time with 
colleagues and peers around the U.S. and around the world a 
person's physical location is much less important. Our program 
has worked with people around the world who have access to the 
most recent technical developments at their fingerprints.
    What they are seeking is a quality of life and creative 
environment where they can make the most of their lives. The 
people that we attract to our firm are attracted to Peoria for 
the low cost of living and the higher quality of life that they 
can enjoy with their families. Our real challenge in recruiting 
these employees is to be able to offer them a position where 
they are free to exercise their intellectual talents to the 
fullest. Our strong commitment to research and development 
creates the kind of work environment these people are looking 
for.
    As a result, central Illinois employment base is 
strengthened by the jobs that we and other small businesses are 
creating. As a percentage of our business we have poured huge 
amounts of money into R&D over the past several years. Since 
venture capital firms like ours is much scarcer than is 
generally understood and that we have limited access to credit 
markets we have used money from ongoing operations to fund most 
of our R&D. Many small firms do this and the R&D tax credit can 
be an incredibly important offset to this utilization of scarce 
capital. It is a very important point that the committee needs 
to consider. Small firms are the innovators of tomorrow and 
represent critical sources of new tax revenue for both the 
state and Federal governments.
    In order to stay competitive and grow, we pour every 
available tax dollar into R&D. The money freed up by the R&D 
tax credit gets plowed back into businesses in the form of 
additional salaries and investment in the future. Furthermore, 
the R&D investment we are doing is helping in the 
transformation of the work place. A significant percentage of 
our employees are the sons and daughters of large manufacturing 
companies. Although Peoria is blessed with a strong industrial 
base through Caterpillar equipment, we and other small tech 
firms like ours are contributing to the development of a 
knowledge economy in central Illinois.
    Although I am concerned about the impact the R&D tax credit 
has on businesses like Direct Logics, I am also very concerned 
about its impact on the international competitiveness of the 
U.S. Industry in general. The world is truly becoming flat when 
it comes to competitive advantage. As a technology executive, I 
am being contacted daily by foreign outsourcing firms who would 
like to subcontract work with us. We don't do any 
subcontracting work with foreign firms. But what I am struck by 
when I speak with these executives is the level of work they 
are doing and the sophistication of the work that they are 
doing.
    During the past 150 years the competitive advantage that 
nations and their commercial enterprises have enjoyed represent 
significant barriers to entry for foreign competitors. In many 
cases it took years or decades for foreign competitor to enter 
commercial space and then supplant the domestic industry. Now, 
in many industries that time line has shrunk from years to 
months. Furthermore in the past, older industries that were 
captured by foreign competition were typically replaced by new 
domestic industries and services that provide a greater overall 
GNP growth in the industries that it replaced.
    Now, I still believe that the U.S. is an innovation leader 
in many technology categories. Our dominance time though in 
those categories is shrinking. I am not sure that there is any 
way to slow down this progression since it seems to be a part 
of the accelerating nature of global economics, but I do think 
the government needs to provide industry with the tools to help 
innovation occur in the first place. I believe that the U.S. 
can continue to innovate and create new businesses well into 
the future. I think this is a function of national creativity 
of our society. However, it is critical that government support 
this innovation any way it can.
    And the R&D tax credit is an important tool that supports 
this goal. Properly applied it not only encourages industry to 
invest in R&D, but it acts to ensure that those dollars are 
spent domestically. The R&D tax credit must be considered in 
its global context. It is my understanding that the U.S. credit 
has become much less competitive relative to the structures 
offered by other governments. In this sense, the U.S. 
Government needs to compete with foreign governments making our 
R&D tax credit more attractive relative to foreign 
alternatives. This will encourage larger firms to locate their 
R&D projects in their U.S. operations rather than abroad where 
the tax incentives might be relatively greater. Further it may 
encourage foreign firms to relocate their R&D in the United 
States. In evaluating this, I think that this committee needs 
to question why other governments are much generous with this 
type of credit.
    Looking at it from a business person's point of view, I 
must assume that those countries have made a rational 
determination that it enhances their own competitive advantage 
and it ultimately pays for itself through greater tax revenues. 
There are many proposals for how to maximum the utility of this 
tax. Although I do not have the expertise to tell you exactly 
how to structure the tax I can offer the following general 
opinions. First I think that the tax should become a permanent 
fixture of our tax code. Second the rates should be made 
competitive with the rates of other countries. And third, you 
should consider allowing more rapid expensive equipment to 
purchase and support R&D efforts. I believe that the R&D credit 
is critical to the continued innovation and growth of the U.S. 
economy. And I thank you for considering my testimony.
    Chairman Nye. Thank you very much.
    [The statement of Mr. Barrett is included in the appendix.]
    Chairman Nye. Finally, I would like to introduce Mr. 
Bendis, Mr. Richard Bendis, President and CEO of Innovation 
America located in Philadelphia, Pennsylvania. Mr. Bendis is a 
frequent consultant and speaker to international technology 
based economic development organizations. Innovation America 
works towards accelerating the growth of the entrepreneurial 
innovation economy in America. We are happy to have you, Mr. 
Bendis, and we are ready to hear your opening statement.


                  STATEMENT OF RICHARD BENDIS

    Mr. Bendis. Thank you, Chairman Nye and Ranking Member 
Schock. Good afternoon. My name is Rich Bendis, and I am the 
President and CEO of Innovation America. I am also a long-time 
member of the American Society of Mechanical Engineers, a 
founding board member of both the National Association of Seed 
and Venture Funds and the State Science and Technology 
Institute and a former technology entrepreneur who has 
benefited from R&D tax credits. I want to thank the 
subcommittee for providing me the opportunity to comment on the 
importance of extending and making permanent the research and 
experimentation tax credit. Innovation America, ASME and NASVF 
support this extension.
    Innovation America also supports the R&D credit coalitions 
recommendations of a permanent R&D tax credit at a commensurate 
rate for all companies, a 20 percent simplified credit and a 
longer extension of the traditional credit. Since 1981 when the 
Federal R&D tax credit was enacted the U.S. Government sought 
to encourage businesses to look to the future and invest in 
long-term high risk high dollar investments that would create 
high wage jobs. The R&D tax credit helps to lower the cost of 
these high risk investments that are necessary to keep American 
companies competitive and foster growth in the overall economy 
especially during these challenging economic times.
    The National Academies has cautioned that without high 
quality knowledge-intensive jobs and the innovative enterprises 
that lead to discovery and new technology, our economy will 
suffer and our people will face a lower standard of living. Our 
trading partners around the globe recognize the long-term value 
of R&D and have moved aggressively to implement generous and 
permanent tax policies that attract these vital investments to 
their shores. In addition to the Federal R&D tax program, at 
least 38 States utilize tax credit programs as economic 
development incentives. A research paper published in Economic 
Development Quarterly "in-state R&D tax credits and high 
technology establishments" concluded that State R&D tax credit 
programs have significant and positive effects on a number of 
high tech establishments in the state.
    R&D tax credit programs vary from State to State as some 
offer refundable credits set up in a way that the amount 
provided to a company utilizing the R&D tax credit may exceed 
the company's actual State income tax liability. Some States 
allow credits to carry forward to future years while others set 
percentage caps on the tax liability that can be applied to 
credits. And additionally some States allow for transferability 
or sale of credits in the event the company has no tax 
liability. That generates cash for these entrepreneurial firms 
which is needed at those early stages of growth. I also believe 
that while the R&D tax credit program extension is a critical 
component of the U.S. innovation portfolio of programs it is 
not the only area that this subcommittee should be concerned 
with.
    In the chairman's opening comments, he referred to job 
creation as one of the highest priorities for this 
administration and Congress. Especially those created by 
innovative entrepreneurial companies. If recent history is any 
indication for 3 years following both the 1990 and 2000 
recessions, small businesses of less than 20 employees were 
responsible for over 100 percent of the net new job creation in 
America.
    Unfortunately, what worked after the last two recessions 
might not work as well today due to the fragile nature of our 
financial markets. The valley of death, which represents the 
entrepreneurial funding gap between a half a million and $5 
million, has gotten wider and deeper. Venture capitalist 
average investment last year was $8.3 million per investment 
and they had their lowest investment quarter in 13 years last 
quarter. Angel investors last year invested 26 percent less 
than the prior year due to their own personal financial crisis 
and 47 out of 50 States have budget problems that will 
negatively impact their entrepreneurial support programs. For 
the first time in U.S. history, we now have a perfect storm 
affecting our innovation economy.
    In December of 2008, we met with the members of the Obama 
transition team and presented a proposal for creating an 
national innovation framework. The details of this proposal 
have also been submitted to this subcommittee in a white paper 
which was published by Science Progress. In summary, we 
recommended that a national innovation seed capital jobs fund 
to funds be created and we support the permanent 
reauthorization of the SBIR and STTR programs. We also 
recommend that an integrated national innovation strategy be 
developed and that the administration prioritize innovation as 
part of their national agenda.
    Time does not permit a detailed discussion of this 
innovation strategy, but it is complementary to the R&D tax 
credit discussion that has occurred today in this subcommittee 
hearing.
    In closing I strongly support the permanent extension of 
the R&D tax credit program as it is an extremely important 
component of America's innovation program portfolio. And I 
would like to thank you for the opportunity to present my view 
to this subcommittee and request that my written statement as 
well as other supporting documentation be submitted into the 
record. Thank you very much.
    Chairman Nye. We will do that. And again thank you for your 
testimony.
    [The statement of Mr. Bendis is included in the appendix.]
    Chairman Nye. Thank you to everyone, not only for making 
the effort to be in here today, but for bearing with us while 
we were a little bit delayed. I am going to be mindful of the 
time we have kept you here. I am going to ask a couple of 
follow-up questions and then yield to Mr. Schock as much time 
as he would like and then we will conclude. But I want to just 
pick up on a couple of things that I think are important that I 
have heard today. And one is starting with Mr. Heenan. You 
mentioned the effect of the AMT and not being able to take 
advantage of the R&D tax credit. I just want to get a poll. Has 
anybody else experienced that problem or know folks in the 
industry who have had the same issue by a raise of hand if that 
is clearly an issue. Mr. Heenan do you have any suggestions how 
we can solve that.
    Mr. Heenan. I guess the simplest suggestion would be to 
carve out the R&D tax credit from the AMT. If you could allow 
that credit to be taken if someone is subject to AMT then it 
would eliminate the problem.
    Chairman Nye. Well, that sounds very direct and reasonable. 
I want to follow up on also an issue that a number of people 
have mentioned about the expense of compliance. And I believe, 
Mr. Heenan, you and Mr. Ferros had also mentioned having some 
trouble with that. And again, as I mentioned in my opening 
statement I have talked to other business owners in the Hampton 
Roads area in my district who have said they had some trouble 
with that.
    Mr. Ferros, can you comment on how you have handled that 
and how big of an expense that has been for you at Blackhawk.
    Mr. Ferros. Well, the way we typically handle it is we have 
had to set up some sophisticated accounting and we do project 
related accounting that is very specific to the R&D process. So 
our engineers have to maintain time records, project specific 
records. We have a lot of specific documentation that we have 
to have available for the specialists as they come in to ensure 
that we not only have sufficient documentation but we put it in 
place for a potential IRS audit. What I have been told from our 
tax professionals is that this is a tier one IRS topic. 
Consequently every year we submit our tax filings. We feel that 
the R&D tax credit will be subject to review. So we go through 
the extra steps and consequently the extra cost to ensure that 
we are in compliance. For the small business person, I think 
they just typically avoid it because they don't want to deal 
with the issues, nor do they have the available cash to go 
through the process that is involved in ensuring that they are 
compliant with the IRS regulations.
    Chairman Nye. I would like to ask if any other panelists 
have any other comments on the cost of compliance and the 
complexity. Yes, Mr. Heenan.
    Mr. Heenan. At my company, we do government contracting, so 
we are required by the DOD and other agencies to have a pretty 
robust accounting system. So it actually is not an issue for my 
company today. However, I have had the pleasure of working at 
three other small companies prior to this. None of them did 
government contracting and none of them--all of them did a lot 
of research, none of them went for the R&D tax credit. And the 
reason was simple. We just didn't have the accounting systems 
robust enough to meet the IRS standard for applying for the R&D 
tax credit.
    Chairman Nye. One more follow-up question for Mr. Ferros. 
We are talking about complexity. Can you make any comments 
about, and I understand, and I have heard I think pretty 
consistently today that the permanence of the program would be 
a big help in planning for future years, what about the 
structure and the complexity of the way the tax credit is put 
together and the difficulty in understanding how it is set up. 
Do you have any comments on either ways to make it easier? 
Would something like a flat credit for R&D be something that 
would be more easy to manage.
    Mr. Ferros. Certainly I am a proponent of a very simplistic 
approach. Again, if you are a larger company, you can rely on 
the expertise of professionals. They can depict the 
interpretation of the law. I am a certified public accountant. 
I don't understand the law. I rely on our professionals to come 
in and help us be compliant. As a small business person, 
somebody that is focusing on truly innovative and thought 
provoking and hopefully very significant outcomes, the last 
thing they want to think about is tax compliance. They are 
focused on technology, they are focused on product innovation, 
they are focused on growing their business. Consequently we 
need to keep it simple, they need to understand what the net 
business is for them at the end of the day and they should be 
able to scratch it on a single piece of paper rather than call 
up their CPA and go through a very time consuming and 
sophisticated process. So I am all about simplification. Thank 
you.
    Chairman Nye. Dr. Schoenbach in your testimony you 
suggested that one of the challenges you see from your 
perspective is getting the universities and the businesses 
together and bridging a gap between the two. Do you have any 
specific suggestions of ways we could make that bridge easier?
    Mr. Schoenbach. I think that it requires from our side, 
from a university side, to be more open to the needs of the 
industry. That we don't stay in an ivory tower but that we are 
trying to reach out to industry and ask them what we need to do 
rather than just offer them what we have. And I think what 
happens to a large extent now in universities. For the other 
side, for the industry, I think it would be important to reward 
risk-taking more. Because it is always a risk, to take a new 
project, but the payoff could be very high. If it is possible 
to reward risk-taking in a certain way through incentives that 
could be tax incentives, that would probably also encourage 
small companies, small business to get closer to a university 
and try to find out what is actually available there and cross 
the bridge this way.
    Chairman Nye. Thank you. And I have just one final question 
for Mr. Bendis. You began to lay out, I think, kind of an 
ambitious agenda of other ideas that could be very helpful to 
us in terms of assisting innovative small businesses. I am just 
wondering if you could give us any ideas about specific changes 
to the R&D tax credit that might help us at least get halfway 
there.
    Mr. Bendis. Performance is number one. I think one of the 
problems is that it is somewhat like the SBIR program, which I 
know the House passed on it yesterday. I think there is a 
little frustration amongst all of the practitioners in the 
United States and small businesses that they really can't plan 
long-term on a number of items based on the temporary nature of 
some of these programs. Or they are always going back for 
reauthorization. So there are a number of countries around the 
world who basically look at what the United States creates. 
Simplify it, improve upon it and then they build it into their 
innovation strategy and make it permanent. So the question is 
why should we continue to be the one that designs the programs, 
other people benefit around the world and then we debate our 
own programs which everybody agrees with are the best working 
in the world and we come back and debate them every couple of 
years here in Congress.
    So permanence, I think for these kind of programs, as well 
as other critical programs in the innovation portfolio is 
extremely important. Simplification is another area. And that 
has been talked about by some other panelists. Anything that 
can be done to simplify the program to where a nonaccounting, 
nonlegal person can understand the legislation and whether or 
not they can qualify for it very quickly would be very 
advantageous to entrepreneurial and innovative businesses.
    Chairman Nye. Well, again, I want to thank all of you. You 
have given us some really good ideas to take into account as we 
look at reauthorization. And I would like now to yield to Mr. 
Schock for as much time as he would like.
    Mr. Schock. Well, thank you, Mr. Chairman. You have taken 
some of my very thoughtful and creative questions already, so I 
will be brief. Dr. Schoenbach, to follow up on Chairman Nye's 
question about transferring that technology to businesses, part 
of the bill yesterday was the STTR provision, the small 
business technology transfer program. And I am just wondering 
if your university is able to or if you target businesses who 
may already participate in that program as potential customers 
for your technology that you are developing at the university, 
if there is a way for you to get that information of 
recipients, in other words of those entrepreneurs who are 
already involved with that that are interested in taking the 
risk and developing the technology that a university like yours 
would use. It would seem to me that that might be a good 
program to look at for potential partners.
    Mr. Schoenbach. I think definitely STTRs, and we have done 
several of them, are a good vehicle, to bring certain projects 
to fruition. And SBIRs, as well, with subcontracts to the 
university. So this is a possibility and that can be used. It 
doesn't work for all the projects. Preclinical studies, trials 
and so on, require in my opinion much more funding than is 
available through these STTRs. The other problem sometimes with 
STTRs and SBIRs, especially at Department of Defense, is that 
you have to see what is available. That means you have to find 
a match first before you can start working on a project. And 
very often there is no match. An innovation coming from a 
university, might not have reached that stage where somebody at 
DOD has made a decision this is worth funding. There is a 
certain delay then in all these procedures. But definitely for 
many projects this is an excellent program, and we have made 
use of it several times.
    Mr. Schock. So the limitations in the program aren't so 
much in the way the rules are written, but it is much in the 
grant award sizes don't allow for some of the research.
    Mr. Schoenbach. That is what my opinion is. Some of the 
projects require more funding. So this is one obstacle. And 
particularly if you go into biomedical applications trials are 
very expensive. The other one is the delay in bringing 
innovations to industry. For example, I go into the Internet 
and look at what is available in SBIR and STTR at DOD. I am an 
engineer so this would be my first thing to do, go in the Web 
site of DOD. And then I see the different topics which are 
offered. And some of them might fit, but most of them will not 
fit if I do something which is really innovative. So it 
requires additional work to make people aware of this 
innovation which takes time to do. So this is a matter of 
involving the researcher more in the decision making about 
topics which are worth funding. And I don't know how this could 
be done; this is a matter of procedures.
    Mr. Schock. Mr. Barrett, you mentioned in your testimony 
that in addition to the R&D tax credit perhaps we could offer 
some incentives for what I would interpret as like an 
accelerated depreciation or some kind of incentive for the 
capital required for the R&D. Is that what you are thinking of 
as like an accelerated depreciation method for those 
investments or do you have some specific ideas on what we could 
do as a part of the R&D tax credit to help lessen the burden 
required for some of the more capital intensive research.
    Mr. Barrett. I think that more rapid depreciation would be 
a very good thing because in our business the hardware becomes 
obsolete much more rapidly. Five years, I think, is a typical 
schedule. And it can become obsolete within a year or 2 years, 
depending upon the technology uses. So yeah, looking at that I 
think a little bit more carefully would be warranted.
    Mr. Schock. And then, Mr. Bendis, you talked about 
improving the R&D tax--or research and development tax credit. 
I am wondering if there are specific States that are 
exceptionally good at this or they have a better R&D than other 
States that we can model our legislation at or at least look to 
for ideas.
    Mr. Bendis. As I mentioned, there are 38 States, and a 
number of them have modeled their programs based on what the 
earlier States have done and tried to improve them. I know that 
New Jersey has done some modifications recently, Pennsylvania 
has a very aggressive program. But I think it would be very 
easy. And the State Science and Technology Institute, which is 
a technology based economic development national association 
working with these kind of organizations in all 50 States, 
could very easily summarize for you and this committee what 
some of the best practices are and what some of the 
improvements have been made as well as the National Association 
of Seed Venture Capital. We would be glad to work with the 
committee to look at what some of the innovative things are 
that are occurring in the States that may benefit this 
legislation as you are trying to either extend or make it 
permanent.
    And I don't know if it is too late, but it is never too 
late to look at constant improvements. And I think that the 
platforms of innovation are really occurring at the State 
level. So how do you take advantage of some of the things that 
they have learned from best practices that can be incorporated 
at a Federal level. And we would be glad to work with you on 
that.
    Mr. Schock. Well, I don't think it is too late. I mean, 
that is why we are having the hearing, so we can get ideas and 
feedback and ways to improve. So very good. Thank you all for 
your traveling here and most importantly for putting up with 
our very crazy schedule. Welcome to Congress.
    Chairman Nye. Again, I want to add my word of thanks to 
everyone for spending this time with us and for sharing your 
expertise. You all are on the front lines here and see this in 
execution every day, and it is our job to listen to you and 
then to try to make policy which reflects the reality of what 
is going on out in the economy. So we thank you again. I am 
going to ask unanimous consent that members have 5 days to 
submit statements and supporting materials for the record. 
Without objection so ordered. This hearing is now adjourned.
    [Whereupon, at 1:22 p.m., the subcommittee was adjourned.]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]                               
    
                                 
