[Congressional Record Volume 152, Number 52 (Thursday, May 4, 2006)]
[Senate]
[Pages S4054-S4056]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. BAUCUS:
  S. 2720. A bill to amend the Internal Revenue Code of 1986 to provide 
incentives to improve America's research competitiveness, and for other 
purposes; to the Committee on Finance.
  Mr. BAUCUS. Mr. President, on October 4, 1957, an object the size of 
a basketball shot into space. And history changed.
  The Soviet Union had launched Sputnik. And Americans reacted with 
fear. That fear quickly turned to determination to win the race to 
space.
  Just one month later, the Russians launched Sputnik II with one 
precious passenger: a Russian mutt named Laika. Laika became the first 
living being to orbit earth. Today, a dog in space might seem like a 
good start for a Disney film. But in 1957, American scientists worried 
that these events foreshadowed Soviet military and strategic advantage.
  By the following summer, Congress had created NASA. Sputnik's launch 
had provided the catalyst. For years before, scientific organizations 
and even the White House had declared the exploration of space as a 
priority. It took Sputnik to move us to action.
  Half a century later, we find ourselves waiting for the next Sputnik. 
Report after report has outlined the risk that America runs by not 
doing more in research and education. A recent report entitled 
``Waiting for Sputnik'' cautions that our workforce must include a 
greater percentage of ``knowledge workers''--including scientists and 
engineers--if we are to maintain our technological lead in defense 
capabilities. And another recent report, ``Rising Above the Gathering 
Storm,'' expresses fear that America's lead in science and technology 
can be abruptly lost and difficult or impossible to regain.
  What these reports and others are telling us is one thing: We cannot 
wait for the next Sputnik. We must recognize that our advantage is 
fleeting. We must begin today with more science, more education, and 
more commitment to research to prepare for the future.
  Asia has recognized this. Asia is plowing more funding into science 
and education. China, in particular, understands that technological 
advancement means security, independence, and economic growth. Spending 
on research and development has increased by 140 percent in China, 
Korea and Taiwan. In America, it has increased by only 34 percent.
  Asia's commitment is already paying off. More than a hundred Fortune 
500 companies have opened research centers in India and China. I have 
visited some of them. I was impressed with the level of skill of the 
workers I met there.
  China's commitment to research, at $60 billion in expenditures, is 
dramatic by any measure. Over the last few years, China has doubled the 
share of its economy that it invests in research. China intends to 
double the amount committed to basic research in the next decade. 
Currently, only America beats out China in numbers of researchers in 
the workforce.
  Over the last few months, I have offered a series of proposals to 
improve America's competitiveness. Today, I am pleased to introduce the 
Research Competitiveness Act of 2006. This bill would improve our 
research competitiveness in four major areas. All four address 
incentives in our tax code. Government also supports research through 
Federal spending. But I am not addressing those areas today.
  First, my bill improves and simplifies the credit for applied 
research in section 41 of the tax code. This credit has grown to be 
overly complex, both for taxpayers and the IRS. Beginning in 2008, my 
bill would create a simpler 20 percent credit for qualifying research 
expenses that exceed 50 percent of the average expenses for the prior 3 
years.
  And just as important: The bill makes the credit permanent. Because 
the credit has been temporary, it has simply not been as effective as 
it could be. Since its creation in 1981, it has been extended 10 times. 
Congress even allowed it to lapse during one period.
  The credit expired again just last December. And another short-term 
extension is pending in both tax reconciliation bills in conference. 
Last year, the experts at the Joint Committee on Taxation wrote: 
``Perhaps the greatest criticism of the R&E credit among taxpayers 
regards its temporary nature.'' Joint Tax went on to say, ``A credit of 
longer duration may more successfully induce additional research than 
would a temporary credit, even if the temporary credit is periodically 
renewed.''
  Currently, there are two different ways to claim a tax credit for 
qualifying research expenses. First, the ``traditional'' credit relies 
on incremental increases in expenses compared to a mid-1980s base 
period. Second, the ``alternative incremental'' credit measures the 
increase in research over the average of the prior 4 years.
  Both of these credits have base periods involving gross receipts. My 
bill replaces these with a new credit, known as the ``Alternative 
Simplified Credit,'' based on research spending without reference to 
gross receipts. The current formula hurts companies that have 
fluctuating sales. And it hurts companies that take on a new line of 
business not dependent on research.
  The Senate has passed this alternative formula as an optional credit 
several times. It is now pending in both versions of the tax 
reconciliation bill. It has not yet been enacted, though, even on a 
temporary basis.
  I support the 2-year extension of the R&E credit contained in the 
Senate version of the tax reconciliation bill. That is why this new 
simpler formula in my bill would not start until 2008. That start date 
would give companies plenty of time to adjust their accounting.
  The main complaint about the existing credits is that they are very 
complex, particularly the reference to the 20-year-old base period. 
This base period creates problems for the taxpayer in trying to 
calculate the credit. And it creates problems for the IRS in trying to 
administer and audit those claims.
  The new credit focuses only on expenses, not gross receipts. And is 
still an incremental credit, so that companies must continue to 
increase research spending over time.
  A tax credit is a cost-effective way to promote R&E. A report by the 
Congressional Research Service finds that without government support, 
investment in R&E would fall short of the socially optimal amount. Thus 
CRS endorses Government policies to boost private sector R&E.
  Also, American workers who are engaged in R&E activities benefit from 
some of the most intellectually stimulating, high-paying, high-skilled 
jobs in the economy.
  My own State of Montana has excellent examples of this economic 
activity. During the 1990s, about 400 establishments in Montana 
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, which was less than $20,000 a year during the same 
period. Many of these jobs would never have been created without the 
assistance of the R&E credit.

[[Page S4055]]

  My research bill would also establish a uniform reimbursement rate 
for all contract and consortia R&E. It would provide that 80 percent of 
expenses for research performed for the taxpayer by other parties count 
as qualifying research expenses under the regular credit.
  Currently, when a taxpayer pays someone else to perform research for 
the taxpayer, the taxpayer can claim one of three rates in order to 
determine how much the taxpayer can include for the research credit. 
The lower amount is meant to assure overhead expenses that normally do 
not qualify for the R&E credit are not counted. Different rates, 
however, create unnecessary complexity. Therefore, my bill creates a 
uniform rate of 80 percent.
  The second major research area that this bill addresses is the need 
to enhance and simplify the credit for basic research. This credit 
benefits universities and other entities committed to basic research. 
And it benefits the companies or individuals who donate to them. My 
bill provides that payments under the university basic research credit 
would count as contractor expenses at the rate of 100 percent.
  The current formula for calculating the university basic research 
credit--defined as research ``for the advancement of science with no 
specific commercial objective''--is even more complex that the regular 
traditional R&E credit. Because of this complexity, this credit costs 
less than one-half of 1 percent of the cost of the regular R&E credit. 
It is completely under-utilized. It needs to be simplified to encourage 
businesses to give more for basic research.
  American universities have been powerful engines of scientific 
discovery. To maintain our premier global position in basic research, 
America relies on sustained high levels of basic research funding and 
the ability to recruit the most talented students in the world. The 
gestation of scientific discovery is long. At least at first, we cannot 
know the commercial applications of a discovery. But America leads the 
world in biotechnology today because of support for basic research in 
chemistry and physics in the 1960s. Maintaining a commitment to 
scientific inquiry, therefore, must be part of our vision for sustained 
competitiveness.
  Translating university discoveries into commercial products also 
takes innovation, capital, and risk. The Center for Strategic and 
International Studies asked what kind of government intervention can 
maintain technological leadership. One source of technological 
innovation that provides America with comparative advantage is the 
combination of university research programs, entrepreneurs, and risk 
capital from venture capital, corporations, or governments. Research 
clusters around Silicon Valley and North Carolina's Research Triangle 
exemplify this sort of combination.
  The National Academies reached a similar conclusion in a 2002 review 
of the National Nanotechnology Initiatives. In a report, they wrote: 
``To enhance the transition from basic to applied research, the 
committee recommends that industrial partnerships be stimulated and 
nurtured to help accelerate the commercialization of national 
nanotechnology developments.''
  To further that goal, the third major area this bill addresses is 
fostering the creation of research parks. This part of the bill would 
benefit state and local governments and universities that want to 
create research centers for businesses incubating scientific 
discoveries with promise for commercial development.
  Stanford created the Nation's first high-tech research park in 1951, 
in response to the demand for industrial land near the university and 
an emerging electronics industry tied closely to the School of 
Engineering. The Stanford Research Park traces its origins to a 
business started with $538 in a Palo Alto garage by two men named Bill 
Hewlett and Dave Packard. The Park is now home to 140 companies in 
electronics, software, biotechnology, and other high tech fields.
  Similarly, the North Carolina Research Triangle was founded in 1959 
by university, government, and business leaders with money from private 
contributions. It now has 112 research and development organizations, 
37,600 employees, and capital investment of more than $2.7 billion. 
More recently, Virginia has fostered a research park now housing 53 
private-sector companies, nonprofits, VCU research institutes, and 
state laboratories. The Virginia park employs more than 1,300 people.
  The creation of these parks would seem to be an obvious choice. But 
it takes a significant commitment from a range of sources to bring them 
into being. To foster the creation and expansion of these successful 
parks, my bill will encourage their creation through the use of tax-
exempt bond financing. Allowing tax-exempt bond authority would bring 
down the cost to establish such parks.
  Foreign countries are emulating this successful formula. They are 
establishing high-tech clusters through government and university 
partnerships with private industry.
  Back in 2000, a partnership was formed to foster TechRanch to assist 
Montana State University and other Montana-based research institutions 
in their efforts to commercialize research. But TechRanch is 
desperately in need of some new high-tech facilities. It could surely 
benefit from a provision such as this. I encourage my Colleagues to 
visit research parks in their States to see how my bill could be 
helpful in fostering more successful ventures.
  A related item is a small fix to help universities that use tax-
exempt bonds to build research facilities primarily for federal 
research in the basic or fundamental research area. Some of these 
facilities housing federal research--mostly NIH and NSF funded 
projects--are in danger of losing their tax-exempt bond status. Counsel 
have notified some state officials that they may be running afoul of a 
prohibition on ``private use'' in the tax code, because one private 
party has a superior claim to others in the use of inventions that 
result from research.
  The complication comes from a 1980 law. In 1980, Congress enacted the 
Patent and Trademark Law Amendments Act, also known as the Bayh-Dole 
Act. The Bayh-Dole Act requires the Federal Government to retain a non-
exclusive, royalty-free right on any discovery. In order to foster more 
basic research through Federal-State-university partnerships, we need 
to clarify that this provision of the Bayh-Dole act does not cause 
these bonds to lose their tax-exempt status. And my bill directs the 
Treasury Department to do so. I understand that the Treasury Department 
is aware of this significant concern. Whether or not Congress enacts my 
legislation, I hope that the Treasury Department will clarify the 
situation later this year.
  The fourth major area that my bill addresses is innovation at the 
small business level. Recently, representatives of a number of small 
nanotechnology companies came to visit me. They told me that their 
greatest problem was surviving what they called the ``valley of 
death.'' That's what they called the first few years of business, when 
an entrepreneur has a promising technology but little money to test or 
develop it. Many businesses simply do not survive the ``valley of 
death.'' I believe that Congress should find a way to assist these 
businesses with promising technology.
  Nanotechnology, for instance, shows much promise. According to one 
recent report, over the next decade, nanotechnology will affect most 
manufactured goods. As stated in Senate testimony by one National 
Science Foundation official earlier this year, ``Nanotechnology is 
truly our next great frontier in science and engineering.'' It took me 
a while to understand just what nanotechnology is. But it is basically 
the control of things at very, very small dimensions. By understanding 
and controlling at that dimension, people can find new and unique 
applications. These applications range from common consumer products--
such as making our sunblocks--better to improving disease-fighting 
medicines--to designing more fuel-efficient cars.
  So, to help these small businesses convert their promising science 
into successful businesses, my bill would establish tax credits for 
investments in qualifying small technology innovation companies. These 
struggling start-up ventures often cannot utilize existing incentives 
in the tax code--like the R&E tax credit--because they have no tax 
liability and may have little income for the first few years. They need 
access to cheap capital to get through

[[Page S4056]]

those first few research-intensive years.
  The credit in my bill would be similar to the existing and successful 
New Markets Tax Credit. The New Markets Credit has provided billions of 
dollars of investment to low-income communities across the country. In 
my bill, entities with some expertise and knowledge of research would 
receive an allocation from Treasury to analyze and select qualifying 
research investments. These investment entities would then target small 
business with promising technologies that focus the majority of their 
expenditures on activity qualifying as research expenses under the R&E 
credit.
  In sum, my bill would boost both applied and basic research. It would 
boost research by businesses big and small. And it would foster 
research by for-profit and non-profits alike.
  There is no clear answer to how to address the concerns raised in the 
``Waiting for Sputnik'' report. But the answer is clear that we must 
try--and soon.
  A noted environmentalist once said: ``Every major advance in the 
technological competence of man has forced revolutionary changes in the 
economic and political structure of society.'' From telephones to 
rockets to computers, I believe that this is true.
  Let us work to see that the next big technological advance is 
discovered here in America. Only through continued commitment to 
research can we ensure that it is.
                                 ______