The U.S. R&D tax credit, a proven tool for spurring innovation and creating jobs, has a bittersweet 30th anniversary on August 13. Bittersweet because the credit, the best R&D incentive in the world in the mid-1980s, is one of the weakest today.

This negative trend is bad for manufacturers and the economy, especially now that other countries aggressively court American manufacturers to move their domestic research by offering better and often permanent R&D tax incentives.  (To learn more about what other countries are offering, read this Deloitte survey of R&D tax incentives around the world.)

These countries have discovered the multiple spillover and societal benefits, like a higher standard of living, associated with the innovations derived from research. For sure, there has been a steady increase in the migration of domestic research offshore–the U.S. share of global R&D has dropped from 39 to 33 percent in less than a decade as more nations have entered the race to attract R&D dollars.

The credit’s power to spur innovation and create jobs hasn’t been helped by its history of lapses and retroactive extensions. Since its enactment in 1981, the credit has expired 14 times, including a one-year lapse in the mid-1990s that was never reversed—and the credit is set to expire once again at the end of this year.  The uncertainty caused by these stop-and-go credit extensions has had a damaging impact on companies’ future R&D budgets because companies cannot rely on the credit to exist for the duration of a research project, which typically spans 5 to 10 years for manufacturers.

R&D fuels innovations and technological advances that drive new product development and increased productivity—key factors necessary for growth in the manufacturing sector.  Many lawmakers are voicing repeated interest in creating a pro-manufacturing climate in the United States.  Now they can turn their words into action, specifically through enactment of H.R. 942, bipartisan legislation that would strengthen the alternative simplified research credit rate to 20 percent from its current 14 percent, and make it permanent.  There is a long history of bipartisan, bicameral congressional support as well as presidential support for a strengthened, permanent R&D tax credit.  Future anniversaries of the credit would be sweeter if the U.S. R&D tax credit’s incentive value is restored to a position of global leadership.

 
For more information about the R&D credit, visit the website of the R&D Credit Coalition.

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