[Congressional Record Volume 151, Number 31 (Tuesday, March 15, 2005)]
[Senate]
[Pages S2740-S2743]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. HATCH (for himself, Mr. Baucus, Mr. Grassley, Mr. Kyl, Mr. 
        Smith, Mr. Schumer, and Mr. Kerry):
  S. 627. 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 several of our Finance Committee 
colleagues

[[Page S2741]]

from both sides of the aisle today in introducing legislation that 
would permanently extend and improve the research tax credit.
  Extending the research credit is an important step for the future 
economic growth of the United States. A permanent credit can help our 
economy develop the new technologies that will enhance existing capital 
inputs and make workers more productive. The result will be a stronger 
economy at home, and a more competitive nation abroad. As many of our 
colleagues are aware, the current research credit is set to expire on 
December 31, 2005.
  I believe that if we allow the research credit to expire, we will see 
the negative effects manifest in lower economic growth, fewer jobs 
created, fewer innovative products, and lost opportunities as research 
activities move to other countries with more attractive incentives. We 
should never forget that our Nation's future economic health is 
dependent on the innovations of today.
  In assessing the health of our economy, we find an important 
correlation between economic growth and inflationary pressures. One 
sure way to have strong economic growth without the pain of inflation 
is to increase productivity. And most productivity gains are derived 
from technological advances, which reduce the cost of producing goods 
and services, and thereby help maintain low consumer prices.
  An additional benefit of productivity growth is a corresponding 
increase in corporate profits. Such increases lead to higher returns on 
savings and investment, and higher wages for workers. I believe the 
greatest benefit of increased R&D is productivity growth, which in turn 
forms the foundation of higher living standards.
  Productivity growth also largely determines our society's long-term 
economic welfare. Our ability to deal with budgetary challenges, such 
as Social Security, Medicare, and other entitlements, depends 
critically on the future direction of our productivity.
  From 1995 through 2003, average annual productivity growth was three 
percent, double the 1.5 percent growth rate that prevailed between 1973 
and 1995. According to economists, this surge in productivity is the 
result of businesses beginning to efficiently integrate computer and 
information technology into day-to-day operations. We need a strong and 
permanent research credit in order to continue these gains in 
productivity growth.
  My home State of Utah is a good example of how State economies 
currently benefit from the research credit. Utah is home to various 
firms that invest a high percentage of their revenue in R&D. There are 
thousands of employees working in Utah's technology based companies, 
with thousands more working in other sectors that engage in R&D. 
Approximately 5 percent of the State's non-agricultural workforce is 
employed in research-intensive, high technology sectors.
  Moreover, high technology jobs pay substantially more than the Utah 
average. In 2004, high technology payrolls accounted for 9.2 percent of 
Utah's total payrolls. This is a significant proportion considering 
technology jobs make up only 5 percent of the workforce.
  Utah's largest technology segment is in computer systems design, 
which accounts for more than 20 percent of the State's technology 
employment with approximately 10,700 workers. Furthermore, this sector 
is Utah's second highest exporter of merchandise. This is a prime 
example of an industry group contributing directly to the productivity 
expansion I mentioned earlier.
  The medical equipment manufacturing industry makes up another 
substantial R&D industry group employing nearly 8,000 Utahns. This 
industry has been an important and relatively stable component of the 
technology sector for many years.
  Utah profits from, and also imparts, many ``spill-over'' benefits 
from the innovations developed both within and outside of the state. To 
give one example, more than 7,000 people work in Utah's chemical 
industry. This industry is the State's fourth-largest exporter. It 
benefits greatly from R&D taking place in Utah and throughout the 
country, and it shares the benefits with its trade partners. Research 
and development is clearly the lifeblood of Utah's economy.
  Since 1981, when the research credit was first enacted, the Federal 
Government has joined in partnership with large and small businesses to 
ensure that research expenditures are made in the United States. This 
enhances domestic job creation, and helps the United States to 
internalize more of the economic benefits from the research credit.
  It seems clear that to grow our economy we must enhance our position 
as the world leader in technological advances. Consequently, robust R&D 
spending should permeate our economy. We simply must continue to invest 
in research and development, and the Federal Government needs to 
reaffirm its role as a partner with the private sector. To achieve 
this, I have long advocated a permanent credit, and this body is 
overwhelmingly on record in favor of that proposition. During the 
Senate's debate on the 2001 tax cut bill, I offered, and the Senate 
adopted, an amendment to provide for such a permanent credit. 
Unfortunately, that provision was dropped in conference and we lost a 
great opportunity.
  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. 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.
  While the research credit has proven to be a powerful incentive for 
companies to increase research and development activities, it 
unfortunately does not work perfectly. One reason is that the credit is 
incremental, and was designed to reward additional research efforts, 
not just what a company might have done otherwise. From a tax policy 
perspective, I believe this is the best way to provide an incentive tax 
credit. Nevertheless, it is difficult to craft an incremental credit 
that works flawlessly in every case.
  While the credit works well for many companies, it does not help some 
firms that still incur significant research expenditures. This is 
because the credit's base period of 1984 through 1988 is growing more 
distant and some firms' business models have changed.
  To address this problem, 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.
  The United States needs to continue to be the world's leader in 
innovation. We cannot afford to allow other countries to lure away the 
research that has always been done here. We cannot afford to have the 
lapses in the research pipeline that would result if we do not take 
care of extending this credit before it expires on December 31.
  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 to create a permanent, improved research 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. 627

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

[[Page S2742]]

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Investment in America Act of 
     2005''.

     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, 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 will be 
introduced in the House of Representatives by Congresswoman Nancy 
Johnson and Congressman Ben Cardin.
  Every morning we hear 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 Government Accountability 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 report 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 Reserve Board 
Chairman 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. According to Battelle's 2005 
funding forecast, industrial R&D spending will increase only 1.9 
percent above last year, to an estimated $191 billion, which is less 
than the expected rate of inflation of 2.5 percent. For the fifth year 
in a row, industrial R&D spending growth has been essentially flat.
  Over recent years, industry-financed R&D declined from 1.88 percent 
to 1.65 percent of GDP in the United States between 2000 and 2003, 
while R&D performed by the business sector declined from 2.04 percent 
to 1.81 percent of GDP. Japan, in contrast, saw a steep increase in 
business-performed R&D--from 2.12 percent to 2.32 percent of GDP 
between 2000 and 2002--and modest gains were posted in the EU.
  Moreover, just last week, the World Economic Forum released its 
annual Global Information Technology Report. The rankings, which 
measure the propensity for countries to exploit the opportunities 
offered by information and communications technology, ICT, revealed 
that Singapore has displaced the United States as the top economy in 
information technology competitiveness. As a matter of fact, the United 
States has dropped from first to fifth place in this ranking. Iceland, 
Finland and Denmark are the countries ranked two, three and four out of 
the 104 countries surveyed. Iceland moved up from tenth last year.
  These 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 from some of the most intellectually stimulating, high-paying, 
high-skilled

[[Page S2743]]

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&D 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. And, in this 
legislation 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. This revised and improved R&D credit did pass the Senate last 
year on a 93-0 vote, but a straight short-term extension of current law 
was enacted instead.
  There is no good policy reason to make research more expensive for 
some industries than for others. While the regular R&D 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 Senator 
Hatch and all my colleagues on this important issue.
  I urge my colleagues to support this important piece of legislation.
                                 ______