[Congressional Record Volume 147, Number 7 (Monday, January 22, 2001)]
[Senate]
[Pages S315-S318]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. HATCH (for himself, Mr. Baucus, Mr. Murkowski, Mr. 
        Jeffords, Ms. Snowe, Mr. Kyl, Mr. Rockfeller, Mr. Breaux, Mr. 
        Conrad, Mr. Graham, Mr. Daschle, Mr. Kerry, Mr. Bingaman, Mr. 
        Torricelli, and Mrs. Lincoln):
  S. 41. A bill to amend the Internal Revenue Code of 1986 to 
permanently extend the research credit and to increase the rates of the 
alternative incremental credit; to the Committee on Finance.


          Legislation to Permanently Extend the R&E Tax Credit

  Mr. HATCH. Mr. President, I am very pleased to join with my friend 
Senator Baucus and many of our Finance Committee colleagues today in 
introducing legislation that would permanently extend the research and 
experimentation tax credit.

[[Page S316]]

  Over the past 10 years, our nation has experienced the longest and 
strongest peacetime period of economic expansion in our history. Over 
this past decade, the standard of living for all Americans has 
increased markedly while millions of new jobs have been created. At the 
same time, our federal budget outlook has been transformed from one of 
large and increasing deficits into the indefinite future to one of 
multitrillion dollar surpluses for at least the next ten years.
  Much of the cause of this economic expansion that has so blessed the 
United States is due to a strong surge in our productivity rate. This 
increase in productivity has allowed the economy to continue to grow at 
a rapid pace without the increase in inflation that usually accompanies 
such growth.
  The Congressional Budget Office, Federal Reserve Chairman Alan 
Greenspan, and dozens of leading economists have all heralded the 
increase in our productivity as a key to our economic good times--and 
to their continuance. A major factor of this increase in productivity, 
Mr. President, is spending on research and development. This is what 
our bill today is all about.
  An August 1999 study commissioned by the National Association of 
Manufacturers concluded that as much as two-thirds of productivity 
gains is due to technological advances. These advances, in turn, fuel 
economic growth. The standard model of economic growth argues that one-
third of growth in private-sector output is attributable to advances in 
technology. In the manufacturing sector, as much as two-thirds of 
growth can be attributed to technological advances. Moreover, this 
contribution is expected to increase over the next decade.
  It seems clear to me that if we want to keep our economy strong and 
growing, it is vital that we keep up and even increase these advances 
in technology. How do we do this? The answer is simple. Our nation must 
continue to invest in research and development, both at the public 
level, and especially in the private sector.
  I believe the best way to ensure that private-sector investment in 
research and development continues at the healthy rate needed to fuel 
the productivity gains of the future is to permanently extend the 
current-law research and experimentation credit. This tax provision is 
a proven and a cost-effective incentive to increase private-sector R&D 
spending.
  Studies have shown that the R&E tax credit significantly increases 
research and development expenditures. The marginal effect of one 
dollar of the R&E credit stimulates approximately one dollar of 
additional private research and development spending over the short-run 
and as much as two dollars of extra investment over the long-run.
  Congress has recognized the vital role the R&E credit has played in 
spurring increased research spending by extending the credit ten times 
since its inception in 1981. For most of those years, Congress was 
never able to find the funds to pay for a permanent extension of the 
credit, due to budget constraints. Fortunately, Congress passed a five-
year extension in 1999 that will keep the credit alive until 2004.
  However, Mr. President, permanence is essential to the effectiveness 
of this credit. Research and development projects typically take a 
number of years and may even last longer than a decade. As our business 
leaders plan these projects, they need to know whether or not they can 
count on the R&E tax credit. The continual uncertainty surrounding the 
credit has induced businesses to allocate significantly less to 
research than they otherwise would if they were assured the tax credit 
would be available. This uncertainty undermines the entire purpose of 
the credit and has stifled its full potential for inducing research 
spending. For the government and the American people to maximize the 
return on their investment in U.S.-based research spending, this credit 
must be made permanent.
  In the business community, the development of new products, 
technologies, medicines, and ideas can result in either success or 
failure. Investments carry a risk. The R&E tax credit helps ease the 
cost of incurring these risks. Whereas foreign nations heavily 
subsidize research with public dollars, the United States has typically 
relied less on direct public funds and more on private sector 
incentives. The R&E tax credit has the potential to be an even more 
effective incentive if it were made permanent.
  I am aware that not every company that invests in research and 
development in the U.S. can take advantage of the regular R&E tax 
credit. As the credit's base period recedes and business cycles change, 
the current credit is out of reach for some companies that still incur 
significant research expenditures. To help solve this problem Congress 
enacted the Alternative Incremental Research Credit to help businesses 
that do not qualify for the R&E tax credit. To improve the 
effectiveness of this alternative credit, we have included a proposal 
to slightly increase each of its three incentive levels.

  A permanent extension of this credit may seem costly in terms of lost 
revenue. However, when you consider the value that this investment will 
create for our economy, it is a bargain. In fact, one study estimates 
that a permanent R&E credit would result in our Gross Domestic Product 
increasing by $10 billion after five years and by $31 billion after 20 
years.
  Moreover, making the credit permanent will encourage more companies 
to locate their research activities within the United States. This will 
lead to more jobs and higher wages for U.S. workers. We must recognize 
that international competition is fierce. Many other countries offer 
significant enticements to prompt companies to move research activities 
within their borders. If we fail to ensure at least a level playing 
field, many companies will begin to consider moving their research 
activities abroad and we could lose thousands of precious high-paying 
jobs.
  Findings from a study conducted by Coopers & Lybrand show that 
workers in every state will benefit from higher wages if the R&E tax 
credit is made permanent. Payroll increases as a result of gains in 
productivity stemming from the credit have been estimated to exceed $60 
billion over the next 12 years. Furthermore, greater productivity from 
additional R&E will increase overall economic growth in every state in 
the Union.
  My home state of Utah is a good example of how state economies 
benefit from the research tax credit. Utah is home to a large number of 
firms who invest a high percentage of their revenue on research and 
development.
  For example, between Salt Lake City and Provo lies one of the world's 
biggest stretches of software and computer engineering firms. This 
area, which was named ``Software Valley'' by Business Week, is a 
significant example of one of a growing number of thriving high tech 
commercial regions outside California's Silicon Valley. Newsweek 
magazine included Utah among the top ten information technology centers 
in the world. The Utah Information Technologies Association estimates 
that Utah's IT industry consists of more than 2,500 IT vendor 
enterprises and more than 1,000 eBusiness enterprises, employing tens 
of thousands and bringing billions of dollars to Utah's economy.
  In addition, Utah is home to about 700 biotechnology and biomedical 
firms that employ nearly 9,000 workers. Research and development are 
the reasons these companies exist. Not only do these companies need to 
continue conducting a high quality level of research, but this research 
feeds other industries and, ultimately, consumers. Just ask the 
patients who have benefitted from new drugs or therapies.
  In all, Mr. President there are more than 80,000 employees working in 
Utah's thousands of technology based companies. Many other states have 
experienced similar growth in high technology businesses. Research and 
development is the lifeblood of these firms and hundreds of thousands 
like them throughout the nation.
  During the ten times in the past 20 years that Congress has extended 
the R&E credit for a short time, the ostensible reason has been a lack 
of revenue. The excuse we give to constituents is that we didn't have 
the money to extend the bill permanently. Ironically, it costs at least 
as much in terms of lost revenue, in the long run, to enact short-term 
extensions as it does to extend it permanently.
  With the latest projections of the on-budget surplus, for one year, 
for five

[[Page S317]]

years, and for ten years, this excuse is gone. There is simply no valid 
reason that this credit should not be extended on a permanent basis.
  Moreover, now is the time to extend the provision permanently. By 
making the research credit permanent now, we will send a strong signal 
to the business community that a new era of stronger support for 
research has dawned.
  The timing could not be better because, as I mentioned, many research 
projects, especially those in pharmaceuticals and biotechnology, must 
be planned and budgeted for months and even years in advance. The more 
uncertain the long-term future of the research credit is, the smaller 
the potential of the credit to stimulate increased research. Simply 
knowing of the reliability of a permanent research credit will give a 
boost to the amount of research performed, even before the current 
credit expires in 2004.
  A permanent R&E credit has wide support in both the Senate and the 
House. Last year, this body passed by a vote of 98-1 an amendment that 
would have permanently extended the credit. Unfortunately, all 
amendments were ultimately stripped from the underlying bill. The bill 
we are introducing today is identical to legislation introduced earlier 
this month by Representatives Nancy Johnson and Robert Matsui. The 
identical bill in the 106th Congress was cosponsored by 164 other 
members of that body. Moreover, the permanent extension of the credit 
is a major provision in President Bush's tax cut plan, and was 
supported by both former President Clinton and by Al Gore.
  In conclusion Mr. President, if we fail to make the R&E tax credit 
permanent, we are limiting the potential growth of our economy. How can 
we expect the American economy to hold its lead in the global economic 
race if we allow other countries to take the edge in innovation? Making 
the tax credit permanent will keep American business ahead of the pack. 
It will speed economic growth. New technology resulting from American 
research and development will continue to improve the standard of 
living for every person in the U.S. and also worldwide.
  Simply put, the costs of not making the R&E tax credit permanent are 
far greater than the costs of making it permanent. As we begin the new 
millennium, we cannot afford to let the American economy slow down. Now 
is the time to send a strong message to our companies and to the world 
that America intends to retain its position as the world's foremost 
innovator.
  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. 41

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

     SECTION 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.--Paragraph (1) of section 45C(b) 
     of such Code is amended by striking subparagraph (D).
       (c) Effective Date.--The amendments made by this section 
     shall apply to amounts paid or incurred after the date of the 
     enactment of this Act.

     SEC. 2. INCREASE IN RATES OF ALTERNATIVE INCREMENTAL CREDIT.

       (a) In General.--Subparagraph (A) of section 41(c)(4) of 
     the Internal Revenue Code of 1986 (relating to election of 
     alternative incremental credit) is amended--
       (1) by striking ``2.65 percent'' and inserting ``3 
     percent'',
       (2) by striking ``3.2 percent'' and inserting ``4 
     percent'', and
       (3) by striking ``3.75 percent'' and inserting ``5 
     percent''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years ending after the date of the 
     enactment of this Act.

  Mr. BAUCUS. Mr. President, it is with great pleasure that I join with 
my colleague from Utah, Senator Hatch, and my other colleagues on the 
Senate Finance Committee, to introduce this bill, which is so vitally 
important to American businesses competing in the global marketplace. I 
am particularly pleased that this bill includes as original cosponsors 
a majority of members of the Senate Finance Committee. This legislation 
is bipartisan and bicameral. A companion bill was introduced--on the 
very first day of this Congress--in the House of Representatives by 
Congresswoman Nancy Johnson and Congressman 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 and experimentation expenses provides a modest 
but critical incentive for companies to conduct their research in the 
United States, thus creating high-skilled, high-paying jobs for 
American workers.
  The R&D 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&D tax credit 
is matched by another dollar of spending on research over the short run 
by private companies, and two dollars 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, Japanese and German spending on non-defense R&D as a 
percentage of GDP has grown, while U.S. spending has remained 
relatively flat since 1985. The R&D credit is instrumental in keeping 
research dollars in the United States and we must do all we can to make 
sure it remains an effective incentive by eliminating the on-again, 
off-again treatment.
  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 only to be extended retroactively, the 1996 extension left a 12-
month gap 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. Let me be clear: companies are under-investing in research 
because there has been continued uncertainty about the credit's life. 
Much of the economic gains we enjoy now is the direct result of 
research, technology and innovation undertaken in prior decades. If 
current indicators are accurate in their warning of a slowdown in our 
economy, then now is appropriate time to send a strong signal to our 
research-intensive industries. We must demonstrate our long-term 
commitment to U.S.-based research by finally putting an end to all 
uncertainty and making the R&D credit permanent.

  Much research and development takes years to mature. Companies must 
make their commitment to research projects often five or ten years into 
the future. The more uncertain the future of the credit, the fewer 
additional research projects will be started. If companies evaluating 
research projects cannot rely on the seamless continuation of the 
credit, then they are less likely to invest on research in this country 
and 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 workforces and join the U.S. 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&D credit factors into their economic calculations, 
and makes keeping these jobs in the U.S. more difficult.
  According to a 1998 study conducted by Coopers & Lybrand, making the 
R&D credit permanent will provide a substantial positive stimulus to 
investment, wage-growth, productivity, and overall economic activity 
for this country. Payroll increases from gains in productivity are 
estimated to total $64 over the period 1998 through 2010. In

[[Page S318]]

the year 2010 alone, the payroll increase is estimated to total nearly 
$12 billion.
  Also according to the study, Gross State Product, which is the basic 
measure of economic activity in a state, will rise overall by nearly 
$58 billion between 1998 and 2010 as a result of a permanent credit. 
Nearly three-fifths of this increase nationally is attributable to 
additional value added by industries that generally do not perform R&D 
themselves, but benefit from the R&D done by companies in other 
industries.
  Gains in payroll and in Gross State Product are not limited to states 
regarded as centers for technological innovation. Although such regions 
of the country certainly benefit from the credit, each and every state 
will profit in some measurable way from the credit since all sectors of 
the economy--agriculture, mining, basic manufacturing, and high-tech 
services--benefit from productivity improvements resulting from the 
additional research and development caused by the credit.
  My own state of Montana is an excellent example of this economic 
activity. According to the 1998 study, the total increase in payroll 
due to the R&D credit for the years 1998-2010 is estimated to be just 
over $250 million. Neither of these increases place Montana in the top 
tier of states benefitting from the credit. However, looking beyond 
these numbers, the impact of the credit in Montana is substantial. In 
1995, 12 of every 1,000 private sector workers were employed directly 
by high-tech firms in Montana. 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 1995 of 
$19,500 per year. Many of these jobs would never have been created 
without the assistance of the R&D credit. And many more jobs in Montana 
are dependent upon the growth and stability of the high-tech sector. 
Although the cumulative numbers may not be high in comparison with 
other states, the impact of the R&D credit on Montana's economy is 
clear.

  The American Bar Association Section of Taxation, the American 
Institute of Certified Public Accountants Tax Division, and the Tax 
Executives Institute urge making the credit permanent. In their view, 
uncertainty in the tax law breeds complexity. The constant need to 
extend the R&D credit and other Code provisions adds confusion to the 
law and, in many cases, undermines the policy reasons for enacting the 
incentives in the first place. This is so because the provisions are 
intended to encourage particular activities but uncertainty surrounding 
whether the provisions will be extended leaves taxpayers unable to plan 
for those activities. The on-again, off-again nature of these 
provisions, coupled in some cases with retroactive enactment (which 
often necessitates the filing of an amended return), contributes 
mightily to the complexity of the law.
  Senator Hatch and I are not newcomers to this issue. We have jointly 
introduced bills to make the R&D credit permanent in previous 
Congresses only to end up with short-term extensions. Last year, we 
came close. During consideration of the bill to repeal the estate tax 
(H.R. 8) last July, the Senate voted 98 to 1 in favor of making the R&D 
tax credit permanent.
  This year, we hope to be successful. The hard work we have done to 
bring our budget into balance is finally beginning to pay off, and the 
projected budget surpluses gives us an opportunity to think carefully 
about how best to allocate our resources. Making the R&D credit 
permanent is a wise use of budget dollars because of the direct 
positive impact on economic growth and productivity. This is not just a 
corporate issue. The real winners from past research investments have 
been the American people--in higher wage jobs, higher standards of 
living, and better health and lifestyle. This is a use of tax dollars 
that benefits all of us who are working to expand employment, increase 
wages and keep our Nation at the cutting edge of technological 
development. We were gratified to see that a permanent R&D credit was 
included in the tax plan on which President Bush campaigned, and I 
sincerely hope we can work together to finally make this year the year 
we fulfill our commitment to long-term, U.S.-based research.
  I urge my colleagues to support this important piece of legislation.
                                 ______