[Congressional Record Volume 144, Number 132 (Monday, September 28, 1998)]
[Senate]
[Pages S11007-S11009]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                             R&D TAX CREDIT

  Mr. BINGAMAN. Mr. President, both the House and the Senate are 
working on what is likely to be a final tax bill for this Congress. As 
we go about considering tax bills, I hope my colleagues on both sides 
of the aisle will be thinking about the long-term economic effects of 
the legislation.
  Let me start, of course, by making a distinction that should be 
obvious to all of us who work around here. That is the distinction 
between tax bills that are paid for and tax bills that are not paid for 
and that instead obtain the revenue for the tax cuts from the surplus 
that we anticipate.
  I agree with the President that if we do a tax bill this year--and I 
hope we are able to do a tax bill--that we will pay for the tax bill, 
that we take whatever revenue is required to make those cuts in taxes, 
and that we will find revenue in the current budget with which to do 
that.
  I do not think the American people want us to go ahead and begin to 
spend an anticipated surplus which we have not even realized as yet. 
Unfortunately, some of the tax proposals--particularly the one passed 
by the House on Saturday--have that very major defect.
  But let me get back to the primary subject of my comments, which is 
that if we pass tax legislation we need to be thinking about the long-
term economic effects of such legislation. Will such bills enhance our 
economy by promoting sound investments and sustained future economic 
growth? Or, instead, will they threaten our projected budget surplus 
and Social Security without

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really doing anything for the future economic well-being of the 
country?
  I raise these questions because there is one crucial element of our 
Tax Code, more than any other provision in the code, that is directed 
at our future economic growth. In all the discussions of taxes that 
have occurred over the past few months, that provision appears to have 
been given very short shrift. I am referring to the research and 
experimentation tax credit, commonly called the R&D tax credit, which 
is slated for yet another minimal, temporary extension, the way tax 
bills seem to be evolving here today.
  As I am sure most of my colleagues are well aware, investment in 
research and development is the single largest contributing factor to 
our past, present and future economic growth. In an economy that is 
increasingly knowledge-based and increasingly globalized, it is also an 
important factor in the competitiveness of American industry. Research 
leads to improved productivity, economic growth, better jobs and new 
technologies--technologies that have spawned entire new industries and 
revolutionized the way people do business around the world. But our 
research tax policy has not been keeping pace with today's economic 
realities.
  Research investment is of greater and greater importance to American 
industry. But the on-again-off-again research credit is becoming less 
and less certain. It was allowed to expire for the ninth time this past 
June, and is slated for a renewal for less than 2 years.
  Research is being done by large and small businesses in a growing 
variety of different industries. The way that the credit is currently 
structured, some companies derive incentive value from it, but others, 
even though they may be making identical research investments, do not 
get value.
  Research is also being done increasingly in partnerships. Without 
partnerships between industry and Federal laboratories, we would never 
have created the Internet. Without collaborations between independent 
industry and universities, we would never have biotech. Without 
alliances among large and small firms, and in broad-based research 
consortia, we would not be seeing the efficiency gains in our 
manufacturing base that have been bridging the benefits of 
technological advances to every corner of our economy. But the research 
credit, as it is currently structured, does little, if anything, to 
encourage these partnerships.
  Research is changing. It is important to American business. Its 
importance to American business is growing. Yet, our policy is stuck in 
an outdated status quo.
  We have an R&D tax credit that is complicated and difficult for many 
companies--especially small companies--to use. We have an R&D tax 
credit that offers almost no incentive--less than three cents per 
additional dollar of research investment--for many of our, 
historically, most innovative research-intensive companies. We have an 
R&D tax credit that does nothing to encourage the interchange of ideas 
between industry and our great universities, Federal laboratories and 
other companies. We have an R&D tax credit that cannot even be relied 
upon as an incentive that will last for more than 1 or 2 years at a 
time. So the obvious question is: What kind of a commitment is this to 
America's economic future?
  The U.S. Senate has an opportunity, as we consider tax legislation in 
the remaining days of this Congress, to move beyond this sorry status 
quo. Improvements to our research tax policy could not come at a more 
critical time--while our economy and our Federal finances are in good 
order but as we look with some anxiety toward prospects for continued 
prosperity.
  I introduced legislation this summer--Senate bill 2268--to improve 
the research credit. As the ranking member of the Joint Economic 
Committee, I then organized a workshop in conjunction with the Senate 
Science and Technology Caucus on the topic of R&D tax credits. That 
workshop received the views of a broad range of experts from 
government, industry and universities who have studied the problems of 
the current R&D tax credit, and have proposed changes to make it more 
effective.
  Invitations to attend the workshop on the tax issues were sent to 
legislative assistants from every Member in the Senate. As a result of 
that workshop, and the input that I have received from other experts in 
research groups and small businesses, I have developed an improved 
research and development tax credit proposal that adds to Senate bill 
2268 provisions that will make the bill even more effective in 
stimulating partnerships through public-benefit research consortia, and 
that will provide small, high-tech businesses with tax credits for 
patent filing so that small businesses can more effectively defend 
their inventions, both here and abroad.
  Mr. President, I ask unanimous consent that the text of this new 
proposal be printed in the Record following my remarks.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  (See Exhibit 1.)
  Mr. BINGAMAN. Some of my colleagues will undoubtedly be concerned 
about the cost of improving and making permanent the R&D tax credit, 
even though improvements like those in S. 2268 are long overdue. But I 
think there is an even more important cost to consider. What will it 
cost us if we don't improve the R&D tax credit?
  Limiting an extension of the R&D tax credit to 20 months, as has been 
proposed in some of the legislation working its way through Congress, 
just because of the budgetary scoring consequences, and with full 
knowledge that we will be back in 20 months with another temporary 
extension that will also be limited by scoring considerations, is a 
false economy. The long-term revenue cost to the Treasury of ten one-
year extensions of the credit, or five two-year extensions, or one ten-
year extension are all the same. We are kidding ourselves if we think 
we were really saving any money by continuing with these piecemeal, 
temporary extensions. In fact, this scoring-driven strategy of repeated 
short-term extensions is worse than a fiscal parlor-trick. It is 
irresponsible public policy. Why? Because the unpredictable, on-off 
nature of the short-term extensions keeps America from fully realizing 
the long-term investments that a R&D tax credit should produce. Thus, 
we are failing to maximize the public benefits of the tax credit, we 
are reducing the degree to which it can stimulate research and 
invigorate our economy, and we are losing future tax revenues that 
would come from R&D-driven economic growth.
  Our current policy, of piecemeal extension of an archaic, 
decreasingly effective tax structure, has gone on for 17 years now--a 
little longer than I have served in the Senate--and I am not the first 
to propose that we take a better approach. My colleague, the senior 
Senator from New Mexico, has proposed similar improvements to the R&D 
tax credit. Improving and making permanent the R&D tax credit should be 
a bipartisan cause. When the Senate considers tax legislation, I look 
forward to working on this issue with all of my colleagues who care 
about our economic future, and I urge the members of this body to treat 
research and development as an urgent priority in our upcoming 
deliberations.

                               Exhibit 1

     SEC.  1. PERMANENT EXTENSION OF RESEARCH CREDIT.

       (a) In General.--Section 41 of the Internal Revenue Code of 
     1986 (relating to credit for increasing research activities) 
     is amended by striking subsection (h).
       (b) Conforming Amendment.--Section 45C(b)(1) of the 
     Internal Revenue Code of 1986 is amended by striking 
     subparagraph (D).
       (c) Effective Date.--The amendments made by this section 
     shall apply to amounts paid or incurred after June 30, 1998.

     SEC.  2. IMPROVED ALTERNATIVE INCREMENTAL CREDIT.

       (a) In General.--Section 41 of the Internal Revenue Code of 
     1986 (as amended by section ____1) is amended by adding at 
     the end the following new subsection:
       ``(h) Election of Alternative Incremental Credit.--
       ``(1) In general.--At the election of the taxpayer, the 
     credit under subsection (a)(1) shall be determined under this 
     subsection by taking into account the modifications provided 
     by this subsection.
       ``(2) Determination of base amount.--
       ``(A) In general.--In computing the base amount under 
     subsection (c)--
       ``(i) notwithstanding subsection (c)(3), the fixed-base 
     percentage shall be equal to 85 percent of the percentage 
     which the aggregate qualified research expenses of the 
     taxpayer for the base period is of the aggregate gross 
     receipts of the taxpayer for the base period, and
       ``(ii) the minimum base amount under subsection (c)(2) 
     shall not apply.

[[Page S11009]]

       ``(B) Start-up and small taxpayers.--In computing the base 
     amount under subsection (c), the gross receipts of a taxpayer 
     for any taxable year in the base period shall be treated as 
     at least equal to $1,000,000.
       ``(C) Base period.--For purposes of this subsection, the 
     base period is the 6-taxable year period preceding the 
     taxable year (or, if shorter, the period the taxpayer (and 
     any predecessor) has been in existence).
       ``(3) Qualified research.--
       ``(A) In general.--Notwithstanding subsection (d), the term 
     `qualified research' means research with respect to which 
     expenditures are treated as research and development costs 
     for the purposes of a report or statement concerning such 
     taxable year--
       ``(i) to shareholders, partners, or other proprietors, or 
     to beneficiaries, or
       ``(ii) for credit purposes.

     Such term shall not include any research described in 
     subparagraph (F) or (H) of subsection (d)(4).
       ``(B) Financial accounting standards.--
       ``(i) In general.--Subparagraph (A) shall only apply to the 
     extent that the treatment of expenditures as research and 
     development costs is consistent with the Statement of 
     Financial Accounting Standards No. 2 Accounting for Research 
     and Development Costs.
       ``(ii) Significant changes.--If the Secretary determines 
     that there is any significant change in the accounting 
     standards described in clause (i) after the date of enactment 
     of this subsection--
       ``(I) the Secretary shall notify the Committee on Ways and 
     Means of the House of Representatives and the Committee on 
     Finance of the Senate of such change, and
       ``(II) such change shall not be taken into account for any 
     taxable year beginning before the date which is 1 year after 
     the date of notice under subclause (I).
       ``(C) Transition rule.--At the election of the taxpayer, 
     this paragraph shall not apply in computing the base amount 
     for any taxable year in the base period beginning before 
     January 1, 1999.
       ``(4) Election.--An election under this subsection shall 
     apply to the taxable year for which made and all succeeding 
     taxable years unless revoked with the consent of the 
     Secretary.''
       (b) Conforming Amendment.--Section 41(c) of the Internal 
     Revenue Code of 1986 is amended by striking paragraph (4) and 
     redesignating paragraphs (5) and (6) as paragraphs (4) and 
     (5), respectively.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1998.

     SEC.  3. MODIFICATIONS TO CREDIT FOR BASIC RESEARCH.

       (a) Elimination of Incremental Requirement.--
       (1) In general.--Paragraph (1) of section 41(e) of the 
     Internal Revenue Code of 1986 is amended to read as follows:
       ``(1) In general.--The amount of basic research payments 
     taken into account under subsection (a)(2) shall be 
     determined in accordance with this subsection.''.
       (2) Conforming amendments.--
       (A) Section 41(a)(2) of such Code is amended by striking 
     ``determined under subsection (e)(1)(A)'' and inserting ``for 
     the taxable year''.
       (B) Section 41(e) of such Code is amended by striking 
     paragraphs (3), (4), and (5) and by redesignating paragraphs 
     (6) and (7) as paragraphs (3) and (4), respectively.
       (C) Section 41(e)(4) of such Code (as redesignated) is 
     amended by striking subparagraph (B) and by redesignating 
     subparagraphs (C), (D), and (E) as subparagraphs (B), (C), 
     and (D), respectively.
       (D) Clause (i) of section 170(e)(4)(B) of such Code is 
     amended by striking ``section 41(e)(6)'' and inserting 
     ``section 41(e)(3)''.
       (b) Basic Research.--
       (1) Specific commercial objective.--Section 41(e)(4) of the 
     Internal Revenue Code of 1986 (relating to definitions and 
     special rules) is amended by adding at the end the following 
     new subparagraph:
       ``(F) Specific commercial objective.--For purposes of 
     subparagraph (A), research shall not be treated as having a 
     specific commercial objective if all results of such research 
     are to be published in such a manner as to be available to 
     the general public prior to their use for a commercial 
     purpose.''
       (2) Exclusions from basic research.--Section 41(e)(4)(A) of 
     the Internal Revenue Code of 1986 (as redesignated by 
     subsection (a)) is amended by striking clause (ii) and 
     inserting the following:
       ``(ii) basic research in the arts or humanities.''
       (c) Expansion of Credit to Research at Federal 
     Laboratories.--Section 41(e)(3) of the Internal Revenue Code 
     of 1986 (as redesignated by subsection (a)(2)(C) of this 
     section) is amended by adding at the end the following new 
     subparagraph:
       ``(E) Federal laboratories.--Any organization which is a 
     federal laboratory within the meaning of that term in section 
     4(6) of the Stevenson-Wydler Technology Innovation Act of 
     1980 (15 U.S.C. 3703(6)).''
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1998.

     SEC.  4. CREDIT FOR EXPENSES ATTRIBUTABLE TO CERTAIN 
                   COLLABORATIVE RESEARCH CONSORTIA.

       (a) Credit for Expenses Attributable to Certain 
     Collaborative Research Consortia.--Subsection (a) of section 
     41 of the Internal Revenue Code of 1986 (relating to credit 
     for increasing research activities) is amended by striking 
     ``and'' at the end of paragraph (1), by striking the period 
     at the end of paragraph (2) and inserting ``, and'', and by 
     adding at the end the following new paragraph:
       ``(3) 20 percent of the amounts paid or incurred during the 
     taxable year (including as contributions) to a qualified 
     research consortium.''
       (b) Qualified Research Consortium Defined.--Subsection (f) 
     of such Code is amended by adding at the end the following 
     new paragraph:
       ``(6) Qualified research consortium.--The term `qualified 
     research consortium' means any organization which--
       ``(A) either--
       ``(i) is described in section 501(c)(3) and is exempt from 
     taxation under section 501(a) and is organized and operated 
     primarily to conduct scientific or engineering research; or
       ``(ii) is organized and operated primarily to conduct 
     scientific or engineering research in the public interest 
     (within the meaning of section 501(c)(3));
       ``(B) is not a private foundation;
       ``(C) to which at least 5 unrelated persons paid or 
     incurred (including as contributions), during the calendar 
     year in which the taxable year of the organization begins, 
     amounts to such organization for scientific or engineering 
     research; and
       ``(D) to which no single person paid or incurred (including 
     as contributions) during such calendar year more than 50 
     percent of the total amounts received by such organization 
     during such calendar year for scientific or engineering 
     research.

     All persons treated as a single employer under subsection (a) 
     or (b) of section 52 shall be treated as related persons for 
     purposes of subparagraphs (C), and as a single person for 
     purposes of subparagraph (D).''
       (c) Conforming Amendment.--Paragraph (3) of section 41(b) 
     of such Code is amended by striking subparagraph (C).
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1998.

     SEC.  5. IMPROVEMENT TO CREDIT FOR SMALL BUSINESSES.

       (a) Assistance to Small and Start-Up Businesses.--The 
     Secretary of the Treasury or his delegate shall take such 
     actions as are appropriate to--
       (1) provide assistance to small and start-up businesses in 
     complying with the requirements of section 41 of the Internal 
     Revenue Code of 1986, and
       (2) reduce the costs of such compliance.
       (b) Repeal of Limitation on Contract Research Expenses Paid 
     or Incurred to Small Businesses.--Section 41(b)(3) of the 
     Internal Revenue Code of 1986 (as amended by section 4) is 
     amended by adding at the end the following new subparagraph:
       ``(C) Payments to eligible small businesses.--
       ``(i) In general.--Subparagraph (A) shall be applied by 
     substituting `100 percent' for `65 percent' with respect to 
     amounts paid or incurred by the taxpayer to an eligible small 
     business.
       ``(ii) Eligible small business.--For purposes of this 
     subparagraph, the term `eligible small business' means a 
     small business with respect to which the taxpayer does not 
     own (or is not considered as owning within the meaning of 
     section 318) 50 percent or more--
       ``(I) if the small business is a corporation, of the 
     outstanding stock of the corporation (either by vote or 
     value), and
       ``(II) if the small business is not a corporation, of the 
     capital or profits interest in the small business.
       ``(iii) Small business.--For purposes of this 
     subparagraph--
       ``(I) In general.--The term `small business' means, with 
     respect to any calendar year, any person if such person 
     employed an average of 500 or fewer employees on business 
     days during either of the 2 preceding calendar years. For 
     purposes of the preceding sentence, a preceding calendar year 
     may be taken into account only if the person was in existence 
     throughout the year.
       ``(II) Startups, controlled groups, and predecessors.--
     Rules similar to the rules of subparagraphs (B) and (D) of 
     section 220(c)(4) shall apply for purposes of this clause.''
       (c) Credit for Patent Filing Fees.--Section 41(a) of the 
     Internal Revenue Code of 1986 (as amended by section 4) is 
     amended by striking ``and'' at the end of paragraph (2), by 
     striking the period at the end of paragraph (3) and inserting 
     ``, and'', and by adding at the end the following new 
     paragraph:
       ``(4) 20 percent of the patent filing fees paid by a small 
     business (as defined in subsection (b)(3)(C)(iii)) to the 
     United States or to any foreign government.''
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1998.
  Mr. President, I yield the floor and I suggest the absence of a 
quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Mr. KYL. Madam President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER (Mrs. Hutchison). Without objection, it is so 
ordered.




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