[Congressional Record Volume 143, Number 27 (Wednesday, March 5, 1997)]
[Senate]
[Pages S1991-S1993]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. HATCH (for himself, Mr. Baucus, Mr. D'Amato, Mr. Abraham, 
        Mr. Bingaman, Mrs. Boxer, Mr. Dorgan, Ms. Moseley-Braun, Mrs. 
        Murray, Mr. DeWine, Mr. Conrad, Mr. Rockefeller, and Mrs. 
        Feinstein):
  S. 405. A bill to amend the Internal Revenue Code of 1986 to 
permanently extend the research credit and to allow greater opportunity 
to elect the alternative incremental credit; to the Committee on 
Finance.


the research and experimentation credit permanent extension act of 1997

  Mr. HATCH. Mr. President, today I am proud to introduce a bill to 
make

[[Page S1992]]

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, 
DeWine, 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 $1 of the 
R&E credit stimulates approximately $1 of additional private research 
and development spending over the short-run, and as much as $2 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 flow 
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 a 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, United States 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 United States as high 
tech manufacturing centers, with educated work forces, 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 United States 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 United States 
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 3-year 
extension. Last year, we extended the credit for only 1 year because of 
revenue constraints in the small business bill. The President's fiscal 
year 1998 budget contains another 1-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 United States 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

[[Page S1993]]

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.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                 S. 405

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. MODIFICATIONS TO RESEARCH CREDIT.

       (a) Credit Made Permanent.--
       (1) In general.--Section 41 of the Internal Revenue Code of 
     1986 (relating to credit for increasing research activities) 
     is amended by striking subsection (h).
       (2) Conforming amendment.--Paragraph (1) of section 45C(b) 
     of such Code is amended by striking subparagraph (D).
       (b) Opportunity To Elect Alternative Incremental Credit.--
     Subparagraph (B) of section 41(c)(4) of the Internal Revenue 
     Code of 1986 (relating to election) is amended to read as 
     follows:
       ``(B) Election.--An election under this paragraph shall 
     apply to the taxable year for which made and all succeeding 
     taxable years unless revoked with the consent of the 
     Secretary.''
       (c) Effective Dates.--
       (1) Extension.--The amendments made by subsection (a) shall 
     apply to amounts paid or incurred after May 31, 1997.
       (2) Election.--The amendment made by subsection (b) shall 
     apply to taxable years beginning after June 30, 1996.

 Mr. BAUCUS. Mr. President, it is with great pleasure that I 
join with my colleague from Utah, Senator Hatch, and my other 
colleagues Senators Abraham, Boxer, Bingaman, Conrad, D'Amato, DeWine, 
Dorgan, Moseley-Braun, Murray, and Rockefeller to introduce this bill, 
which is so critical to the ability of American businesses to 
effectively compete in the global marketplace. Companion legislation 
has been introduced in the House by Representatives Nancy Johnson and 
Robert Matsui.
  Our Nation is the world's undisputed leader in technological 
innovation, a position that would not be possible, absent U.S. 
companies' commitment to research and development. Investment in 
research is an investment in our Nation's economic future, and it is 
appropriate that both the public and private sector share the costs 
involved, as we share in the benefits. The credit provided through the 
Tax Code for research expenses provided a modest but crucial incentive 
for companies to conduct their research in the United States, thus 
creating high-skilled, high-paying jobs to U.S. workers.
  The R&E credit has played a key role in placing the United States 
ahead of its competition in developing and marketing new products. 
Every dollar that the Federal Government spends on the R&E credit is 
matched by another dollar of spending on research over the short run by 
private companies, and $2 of spending over the long run. Our global 
competitors are well aware of the importance of providing incentives 
for research, and many provide more generous tax treatment for research 
and experimentation expenses than does the United States. As a result, 
while spending on nondefense R&D in the United States as a percentage 
of GDP has remained relatively flat since 1985, Japan's and Germany's 
has grown.
  The benefits of the credit, though certainly significant, have been 
limited over the years by the fact that the credit has been temporary. 
In addition to the numerous times that the credit has been allowed to 
lapse, last year, for the first time, when Congress extended the credit 
it left a gap of an entire year during which the credit was not 
available. This unprecedented lapse sent a troubling signal to the U.S. 
companies and universities that have come to rely on the Government's 
longstanding commitment to the credit.
  Much research and development takes years to mature. The more 
uncertain the long-term future of the credit is, the smaller its 
potential to stimulate increased research. If companies evaluating 
research projects cannot rely on the seamless continuation of the 
credit, they are less likely to invest on research in this country, 
less likely to put money into cutting-edge technological innovation 
that is critical to keeping us in the forefront of global competition.
  Our country is locked in a fierce battle for high-paying 
technological jobs in the global economy. As more nations succeed in 
creating educationally advanced work forces and join the United States 
as high-technology manufacturing centers, they become more attractive 
to companies trying to penetrate foreign markets. Multinational 
companies sometimes find that moving both manufacturing and basic 
research activities overseas is necessary if they are to remain 
competitive. The uncertainty of the R&E credit factors into their 
economic calculations, and makes keeping these jobs in the United 
States more difficult.
  Although the R&E credit is not exclusively used by high-technology 
firms, they are certainly key beneficiaries of the credit. In my own 
State of Montana, 12 of every 1,000 private sector workers were 
employed by high-technology firms in 1995, the most recent year for 
which statistics are available. Almost 400 establishments provided 
high-technology services, at an average wage of $34,500 per year. These 
jobs paid 77 percent more than the average private sector wage in 
Montana of $19,500 per year. Many of these jobs would never have been 
created without the assistance of the R&E credit. Making the credit 
permanent would most certainly provide the incentive needed to create 
many more in the future.
  I urge my colleagues to support this legislation, and look forward to 
working with them and with the administration to make the research and 
experimentation tax credit permanent.
                                 ______