[Congressional Record Volume 149, Number 44 (Wednesday, March 19, 2003)]
[Senate]
[Pages S4002-S4005]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. HATCH (for himself, Mr. Baucus, Mr. Grassley, Mr. 
        Rockefeller, Mr. Smith, Mr. Daschle, Mr. Kyl, Mrs. Lincoln, Mr. 
        Thomas, Mr. Kerry, Mr. Bunning, Mrs. Feinstein, Mr. Allen, Mrs. 
        Boxer, Mr. Cochran, Mr. Lieberman, Mrs. Hutchison, Ms. 
        Stabenow, Mr. Ensign, Mr. Bayh, Mr. Allard, Mr. Miller, and Ms. 
        Cantwell):
  S. 664. A bill to amend the Internal Revenue Code of 1986 to 
permanently extend the research credit, to increase the rates of the 
alternative incremental credit, and to provide an alternative 
simplified credit for qualified research expenses; to the Committee on 
Finance.
  Mr. HATCH. Mr. President, I am very pleased to join with my friend 
and colleague Senator Baucus and a majority of our Finance Committee 
colleagues from both sides of the aisle today in introducing 
legislation that would permanently extend and improve the research tax 
credit.
  The 1990s were a great period in American economic history because 
American workers became more productive. This increase in productivity 
allowed the economy to continue to grow faster than almost anyone 
thought possible. Throughout the 1990s, doomsayers said that we had 
reached the economy's speed limit, but we just kept growing. How did 
this happen?
  The Congressional Budget Office, Federal Reserve Chairman Alan 
Greenspan, and dozens of leading economists have all heralded the 
increase in our

[[Page S4003]]

productivity as a key to those economic good times. A major reason for 
this increase in productivity, is the flowering of new ideas through 
research and development. Restoring and increasing that growth is what 
our bill today is all about.
  But why do we need a research tax credit? Are not profitable new 
ideas their own reward? Is not the promise of future profits from new 
drug discoveries and new manufacturing techniques its own incentive? 
Will not companies do large amounts of R&D on their own, without any 
special tax incentives?
  Yes, of course, they will. But they clearly will not do enough. This 
is because cutting-edge research and development has spillover effects 
that reach far beyond the company that makes the investment. When 
companies invent new ideas and new production techniques, those 
inventions last forever, and help people in the United States and 
throughout the world. But the company that invests in R&D will only be 
able to make a sizable profit on its invention for a few years at most. 
That is because either the patent will expire, or other companies will 
imitate the new technique and cut the inventor's hoped-for profits.
  Now, I am all in favor of vigorous competition--it keeps our 
companies strong and efficient. But we have to recognize that 
competition means that innovators will receive only a fraction of the 
benefits of their innovation. Once the imitators pop up and competition 
increases, we know that profits will fall, prices will fall, and the 
benefits of innovation, thankfully, will get passed on to consumers. We 
need innovation, and fortunately, we have a strong, proven tax 
incentive that can encourage that innovation. The benefits of 
innovation reach far beyond the company that invents them. That is why 
we need to give companies incentives to do more innovation.
  I believe the best way to ensure that private-sector investment in 
research and development continues at the healthy rate needed to fuel 
productivity gains in the future is to improve and permanently extend 
the research credit. This tax provision is a proven and a cost-
effective incentive to increase private-sector R&D spending.
  Studies have shown that the research tax credit significantly 
increases research and development expenditures. The marginal effect of 
one dollar of the research credit creates approximately one dollar of 
additional private research and development spending over the short-run 
and as much as two dollars of extra R&D spending over the long-run. 
That, is a good deal for the American taxpayer.
  One of the greatest strengths of the research credit has always been 
that it gave good incentives for more innovation. This year's proposal 
to extend the credit is no exception. This year, we have added a third 
way to qualify for the credit, an elective ``alternative simplified 
credit.'' We propose to base this new alternative credit on how much a 
company has increased its R&D spending compared to the last three 
years. Companies will average their R&D spending over the previous 
three years, and cut that number in half. For every dollar they spend 
over that amount, they get a 12 percent tax credit. If they spend less 
than that amount, they get no credit at all. This is why this credit is 
so effective--it gives benefits to companies that do more, and gives no 
benefits to companies that do less. That is good tax policy, and good 
growth policy.
  Once again, I want to ask my colleagues to make this credit 
permanent. I think we all know that this credit is going to be 
extended, again and again, every few years. It takes time and energy 
for my colleagues to revisit this issue every few years. Can we not 
just, once and for all, make this provision permanent? We know this is 
good policy, and it is one of the most effective tax incentives in the 
code. As I stated earlier, even under today's permanently temporary 
credit, every dollar of tax credit is estimated to increase R&D 
spending by one dollar in the short run and by up to two dollars in the 
long run. And if we make this permanent, those incentives will only 
improve.
  As it stands, companies have to take account of the fact that 
Congress could allow the credit lapse for a few months, as it did a 
number of years ago. So companies hedge their bets, they spend a little 
less on R&D, and our economy suffers as a result. By contrast, 
permanence helps planning. The sooner we make this permanent, the 
sooner companies can begin to enlarge and expand their research and 
development units, and the sooner their innovations will strengthen 
economic growth.
  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 research credit would result in our Gross Domestic 
Product increasing by $10 billion after five years and by $31 billion 
after 20 years.
  By making our workers more productive, this credit will also increase 
wages. That is because study after study shows an iron-clad link 
between worker productivity and worker wages. Findings from a study 
conducted by Coopers & Lybrand show that workers in every state will 
benefit from higher wages if the research 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.
  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 that invest a high percentage of their revenue on research and 
development.
  In Utah, five percent of the workers--51,000 people--work in the 
research-intensive high technology sector. That includes over 10,000 
people working just to design computer systems, and over 6,000 
producing medical equipment. And there is a lot of R&D taking place 
outside of Utah's high tech sector.
  Just to give one example, more than 7,000 people work in Utah's 
chemical industry, and workers in that industry benefit from research 
and development taking place in Utah and throughout the country. 
Aerospace and the drug and pharmaceutical industries are two more 
examples of big Utah employer groups that reap the benefits of R&D. And 
even in the midst of my state's currently weak job market, two 
industries that increased employment in 2002 were the medical equipment 
and the scientific research and development services industries.
  So, the point I want to make is not that Utah needs to do all of the 
research in order to reap the benefits of that research. Instead, the 
point I want to make is that workers in my state will become more 
productive and earn higher wages both when they invent new ideas, and 
when they use new ideas, wherever those new ideas come from.
  I want Utah companies to be able to buy better manufacturing 
equipment, more reliable electronics, and have access to more efficient 
quality control techniques. The workers who use new inventions will get 
just as many benefits as workers who create those new inventions. And 
the evidence clearly shows, that the research credit will increase 
creation.
  In short, there are tens of thousands of employees working in Utah's 
thousands of technology based companies, with tens of thousands more 
working in other sectors that engage in R&D. Beyond that, practically 
all of Utah's hundreds of thousands of workers benefit from higher 
productivity coming from the innovations that researchers both inside 
and outside of Utah produce. Research and development is clearly the 
lifeblood of our economy.
  During the ten times in the past 20 years that Congress has extended 
the research 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.
  A permanent research credit has wide support in both the Senate and 
the House. A few years ago, 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. Moreover, the permanent extension of the credit is a 
major provision in President Bush's tax plan, and was supported by both 
former President Clinton and by Al

[[Page S4004]]

Gore. Again in 2001, this body voted to include a permanent research 
credit in the President's tax plan.
  In conclusion, making the research tax credit permanent will increase 
the growth rate of our economy. It will mean more and better jobs for 
American workers. Making the tax credit permanent will speed economic 
growth. And new technology resulting from American research and 
development will continue to improve the standard of living for every 
person in the U.S. and around the world. I look forward to working with 
my colleagues on the Finance Committee and in the Senate as a whole to 
create a permanent, improved research and development tax credit.
  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. 664

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

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Investment in America Act of 
     2003''.

     SEC. 2. FINDINGS.

       Congress finds the following:
       (1) Research and development performed in the United States 
     results in quality jobs, better and safer products, increased 
     ownership of technology-based intellectual property, and 
     higher productivity in the United States.
       (2) The extent to which companies perform and increase 
     research and development activities in the United States is 
     in part dependent on Federal tax policy.
       (3) Congress should make permanent a research and 
     development credit that provides a meaningful incentive to 
     all types of taxpayers.

     SEC. 3. 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. 4. 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.

     SEC. 5. ALTERNATIVE SIMPLIFIED CREDIT FOR QUALIFIED RESEARCH 
                   EXPENSES.

       (a) In General.--Subsection (c) of section 41 of the 
     Internal Revenue Code of 1986 (relating to base amount) is 
     amended by redesignating paragraphs (5) and (6) as paragraphs 
     (6) and (7), respectively, and by inserting after paragraph 
     (4) the following new paragraph:
       ``(5) Election of alternative simplified credit.--
       ``(A) In general.--At the election of the taxpayer, the 
     credit determined under subsection (a)(1) shall be equal to 
     12 percent of so much of the qualified research expenses for 
     the taxable year as exceeds 50 percent of the average 
     qualified research expenses for the 3 taxable years preceding 
     the taxable year for which the credit is being determined.
       ``(B) Special rule in case of no qualified research 
     expenses in any of 3 preceding taxable years.--
       ``(i) Taxpayers to which subparagraph applies.--The credit 
     under this paragraph shall be determined under this 
     subparagraph if the taxpayer has no qualified research 
     expenses in any 1 of the 3 taxable years preceding the 
     taxable year for which the credit is being determined.
       ``(ii) Credit rate.--The credit determined under this 
     subparagraph shall be equal to 6 percent of the qualified 
     research expenses for the taxable year.
       ``(C) 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. An election under this paragraph may not be made 
     for any taxable year to which an election under paragraph (4) 
     applies.''
       (b) Coordination With Election of Alternative Incremental 
     Credit.--
       (1) In general.--Section 41(c)(4)(B) of the Internal 
     Revenue Code of 1986 (relating to election) is amended by 
     adding at the end the following: ``An election under this 
     paragraph may not be made for any taxable year to which an 
     election under paragraph (5) applies.''
       (2) Transition rule.--In the case of an election under 
     section 41(c)(4) of the Internal Revenue Code of 1986 which 
     applies to the taxable year which includes the date of the 
     enactment of this Act, such election shall be treated as 
     revoked with the consent of the Secretary of the Treasury if 
     the taxpayer makes an election under section 41(c)(5) of such 
     Code (as added by subsection (a)) for such year.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years ending after the date of the 
     enactment of this Act.

  Mr. BAUCUS. Mr. President, I am pleased to again join with my friend, 
Senator Hatch, and my other colleagues, in introducing legislation to 
make a permanent commitment to research-intensive businesses in the 
United States. This legislation is bipartisan and bicameral. A 
companion bill was introduced in January in the House of 
Representatives by Congresswoman Nancy Johnson and Congressman Robert 
Matsui.
  Every morning we here news of some new product or discovery that 
promises to make our jobs easier or our lives better. Many of these 
innovations started with a business decision to hire needed researchers 
and finance the expensive and long process of research and 
experimentation. Since 1981, when the R&D tax credit was first enacted, 
the federal government was a partner in that business endeavor because 
of the potential spillover benefits to society overall from additional 
research spending.
  Research has shown that a tax credit is a cost-effective way to 
promote R&D. The General Accounting Office, the Bureau of Labor 
Statistics, the National Bureau of Economic Research, and others have 
all found significant evidence that a tax credit stimulates additional 
domestic R&D spending by U.S. companies. A reported by the 
Congressional Research Service, CRS, indicates that economists 
generally agree that, without government support, firm investment in 
R&D would fall short of the socially optimal amount and thus CRS 
advocates government policies to boost private sector R&D.
  R&D is linked to broader economic and labor benefits. R&D lays the 
foundation for technological innovation, which, in turn, is an 
important driving force in long-term economic growth--mainly through 
its impact on the productivity of capital and labor. We have many times 
heard testimony from economists, including Federal Research Board Alan 
Greenspan, that the reason our economy grew at such breakneck speed 
during the 1990s stemmed from the productivity growth we realized 
thanks to technological innovations.
  There has been a belief that companies would continue to increase 
their research spending and that the benefits of these investments on 
the economy and labor markets would continue without end. 
Unfortunately, that is not the case. New data compiled by Battelle 
Memorial Institute and R&D Magazine project that for 2003, U.S. company 
spending on research will be mostly flat for the second year in a row. 
According to this report, companies plan a 0.1 percent increase in R&D 
spending in 2003. Spending in 2002 rose a mere 0.3 percent over 2001 
levels. This compares to 2001 when R&D spending grew by 5 percent over 
the previous year. Those numbers should be a wake up call for all of 
us. As research spending falls, so too will the level of future 
economic growth.
  It is also important to recognize that many of our foreign 
competitors are offering permanent and generous incentives to firms 
that attract research dollars to those countries. A 2001 study by the 
Organization of Economic Cooperation and Development, OECD, ranked the 
U.S. ninth behind other nations in terms of its incentives for business 
R&D spending. Countries that provide more generous R&D incentives 
include Spain, Canada, Portugal, Austria, Australia, Netherlands, 
France, and Korea. The United Kingdom was added to this list in 2002 
when it further expanded its existing R&D incentives program. The 
continued absence of a long-term U.S. government R&D policy that 
encourages U.S.-based R&D will undermine the ability of American 
companies to remain competitive in U.S. and foreign markets. This 
disparity could limit U.S. competitiveness relative to its trading 
partners in the long-run.
  Also, U.S. workers who are engaged in R&D activities currently 
benefit

[[Page S4005]]

from some of the most intellectually stimulating, high-paying, high-
skilled jobs in the economy. My own State of Montana is an excellent 
example of this economic activity. During the 1990s, about 400 
establishments provided high-technology services, at an average wage of 
about $35,000 per year. These jobs paid nearly 80 percent more than the 
average private sector wage of less than $20,000 per year during the 
same year. Many of these jobs would never have been created without the 
assistance of the R&D credit. While there may not be an immediate rush 
to move all projects and jobs offshore, there has been movement at the 
margins on those projects that are most cost-sensitive. Once those 
projects and jobs are gone, it will be many years before companies will 
have any incentive to bring them back to the United States.
  We continue to grapple with the need to stimulate economic growth and 
advance policies that represent solid long-term investments that will 
reap benefits for many years to come. Senator Hatch and I repeatedly 
have pointed to the R&E tax credit as a measure that gives us a good 
``bang for our buck.'' I hope this year we can enact a permanent tax 
credit that is effective and more widely available. I encourage my 
colleagues to join us in this effort.
  As we have in years past, our proposal would make the current 
research and experimentation tax credit permanent and increase the 
Alternative Incremental Research Credit, AIRC, rates. This year we take 
one additional but necessary step.
  We propose a new alternative simplified credit that will allow 
taxpayers to elect to calculate the R&D credit under new computational 
rules that will eliminate the present-law distortions caused by gross 
receipts.
  There is no good policy reason to make research more expensive for 
some industries than for others. While the regular R&E tax credit works 
very well for many companies, as the credit's base period recedes and 
business cycles change, the current credit is out of reach for some 
other firms that still incur significant research expenditures. To help 
solve part of this problem Congress enacted the AIRC in 1996 and now we 
propose a way to address the rest of that problem.
  Under current law, both the regular credit and the AIRC are 
calculated by reference to a taxpayer's gross receipts, a benchmark 
that can produce inequities and anomalous results. For example, many 
taxpayers are no longer able to qualify for the regular credit, despite 
substantial R&D investments, because their R&D spending relative to 
gross receipts has not kept pace with the ratio set in the 1984-88 base 
period, which governs calculation of the regular credit. This can 
happen, for example, simply where a company's sales increase 
significantly in the intervening years, where a company enters into an 
additional line of business that generates additional gross receipts 
but involves little R&D, or where a company becomes more efficient in 
its R&D processes.
  Our proposal would correct this by allowing taxpayers a 
straightforward alternative research credit election. Taxpayers could 
elect, in lieu of the regular credit or the AIRC, a credit that would 
equal 12 percent of the excess of the taxpayer's current year qualified 
research expenditures, ``QREs'', over 50 percent of the taxpayer's 
average QREs for the 3 preceding years. Unlike the regular credit and 
the AIRC, this credit calculation does not involve gross receipts.
  The R&D tax credit has proven it can be an effective incentive. We 
need to act to make it a permanent part of the tax code that U.S. 
businesses can rely on. The best thing we can do for our long-term 
economic well-being is to stoke the engine of growth--technology, high-
wage jobs and productivity. I look forward to working with Sen. Hatch 
and all my colleagues on this important issue.
  I urge my colleagues to support this important piece of legislation.
                                 ______