Manufacturers know first-hand that the lack of a permanent tax incentive for R&D investment is negatively impacting US competitiveness in the global economy. Instead, the US R&D tax credit is constantly being extended temporarily and allowed to expire before companies can even consider factoring in the credit for their future investment budgets. Meanwhile, other countries are ramping up their R&D investment incentives and courting US manufacturers to look abroad. (continue reading…)
With the State of the Union address merely hours away, much of the buzz surrounding President Obama’s speech has focused on issues that divide Congress and the business community. Yet, the President has an opportunity to highlight one area where he, Congress, and manufacturers across the country agree –a strong, permanent R&D incentive would boost US innovation, jobs, and global competiveness.
The Administration’s fiscal year 2014 budget proposal included a permanent R&D credit with an enhanced alternative simplified credit (ASC). The Administration even released a report in past years on the merits of a robust US R&D incentive, explaining that an “enhanced and permanent credit will fund more than $10 billion per year in research activity in the United States, supporting nearly 1 million jobs in research.” The report also highlights the credit as a vital way for the US to “out-innovate our competition.”
Manufacturers know firsthand that a strengthened, permanent R&D incentive would provide the certainty needed to enhance its incentive value and help ensure the United States’ leadership in global innovation. For this reason, the R&D Credit Coalition recently wrote a letter to President Obama, urging him to include a permanent R&D incentive in his fiscal year 2015 budget proposal. The letter also called for the ASC to be enhanced to 20 percent, from its current 14 percent.
Since the R&D Credit is now expired, the President should take the opportunity tonight highlight the need to reinstate a strengthened credit as a permanent part of the U.S. tax code, an issue upon which we can all agree.
While Senators Baucus and Hatch introduced legislation last Congress to strengthen and make the research and development incentive permanent, their “blank slate” approach assumes that no tax preferences are safe unless they garner bipartisan support from Senators to be included in tax reform. For this reason, the R&D Credit Coalition sprang into action and wrote a letter to all U.S. Senators, urging them to include support for a strengthened, permanent R&D incentive in their responses to the Baucus-Hatch Dear Colleague.
The R&D Tax Credit is a proven incentive for spurring private sector investment in research and development and for creating high-paying U.S. jobs. The R&D Credit is also needed to keep the United States competitive in the global race for R&D investment dollars, particularly at a time when other countries are offering more robust and permanent R&D incentives, and lower corporate tax rates.
Since manufacturers claim nearly 70% of R&D Credit dollars, the NAM believes that a permanent and competitive research and development incentive should be included in comprehensive tax reform.
To that end, NAM wrote a letter to Senators Baucus and Hatch on July 24, highlighting five tax reform priorities that would help manufacturers grow, create jobs, and compete globally. A permanent, strengthened R&D incentive is one of the five components that would accomplish this goal in tax reform.
To read more about the R&D Credit, click here.
Recently there was yet another plug for a permanent and strengthened R&D Credit, this time from the Washington Post. In a 2/25 editorial “A Chance for Corporate Tax Reform,” the paper applauded the President for including a permanent and strengthened R&D credit in his tax reform framework. As the Post aptly notes, “[P]rivate-sector underinvestment in R&D is a market failure requiring government correction.” On this point, the National Association of Manufacturers says bravo!
More than 30 years of an on again, off again R&D tax credit, is no way to spur cutting-edge technologies and world class innovation in the United States. And this is particularly true today when the credit has expired for the 15th time. It’s no surprise that the U.S. share of global R&D in this century has fallen from 39 percent to 31 percent given the fierce global competition for R&D investment dollars. Once the best in the world during the 1980s, our R&D tax credit today ranks 24 as countries around the globe have created stronger R&D tax incentives to attract the fuel of innovation: R&D. Our global competitors get it. It is not just the economic growth derived from new innovations that makes a country want to be the world’s incubator for the newest innovations, but also the societal spillover benefits and the higher standard of living associated with such innovations.
What manufacturers, who perform nearly 70% of all business R&D in our country know, is that research is inherently risky, costly, and time consuming and a typical R&D project in the manufacturing sector spans five to 10 years. The United States needs more R&D and the tax code can help.
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.
Gov. Jack Markell of Delaware writes about state competitiveness and what’s needed to attract businesses in a Washington Post op-ed today, “Taxes are the wrong focus for economic growth. He raises many serious points toward which manufacturers will be sympathetic:
[Where] will the innovation come from if we don’t make necessary investments in federally funded research? Who will take innovation to market if we don’t help millions of workers retool their skills with appropriate job training? How will we get these new goods to market cost-effectively if we don’t improve our infrastructure? These are precisely the investments other nations are making. We must, too.
The NAM’s Manufacturing Strategy for Jobs and a Competitive America argues for the same priorities, among others. We’re with him.
Indeed, Gov. Markell, a Democrat, is a friend to manufacturing, and his State of the State address in January was right on the mark on how to encourage business.
Still, it seems to us that the Governor is offering a false dichotomy: tax competitiveness versus the other factors like R&D, skills and infrastructure. When Gov. Scott Walker of Wisconsin pounced on Illinois’ decision to raise income taxes by inviting companies to relocate to his state — a story Gov. Markell begins his column with — Gov. Walker was not just telling business he was going to keep taxes under control, he was sending the message that Wisconsin was going to put its entire house in order. A state that can’t balance its budget without a major tax increase is unlikely to set the other policy priorities needed to create a positive business climate.
The other consideration that Gov. Markell does not address is that competitiveness is really a global issue today. States continue to battle each other to attract business, but the real fight is on the country-to-country level. Taxes are so critical in this competition, and the United States is so far behind.
In the Tax Foundation’s latest Fiscal Fact, Scott Hodge reports, “Countdown to #1: 2011 Marks 20th Year That U.S. Corporate Tax Rate Is Higher than OECD Average“:
There is increasing recognition in Washington that the U.S. corporate tax rate is out of step with the lower tax rates of most industrialized and emerging nations. Indeed, 2011 marks the 20th year in which the U.S. statutory tax rate has been above the simple average of non-U.S. countries in the Organization for Economic Cooperation and Development (OECD).
It is now well known that with a combined federal and state corporate tax rate of 39.2 percent, the U.S. has the second-highest overall rate among OECD nations. Only Japan, with a combined rate of 39.5 percent, levies a higher rate.
As Gov. Markell points out, other countries’ governments are spending in critical areas like R&D, infrastructure and skills training. But here’s the point: They’re doing so even with corporate tax rates lower than in the United States.
• The Hill, “Import ban bill has manufacturers worried,” on H.R. 4678, the Foreign Manufacturers Legal Accountability Act: “U.S. manufacturers and Embassy Row are up in arms over a House bill that would ban imports from manufacturers that don’t have a U.S. agent.”
• American Spectator, “A Real Small Business Assist“: [If] if Obama really wanted to help small business, he would instruct Senate Majority Leader Harry Reid to stop using ‘legislative maneuvers’ to block ‘up or down’ votes on amendments that, unlike the underlying bill, would actually ease the burden of the majority of small businesses. Dozens of amendments have been proposed to the “Small Business Jobs And Credit Act” that would help small entrepreneurs by providing regulatory and tax relief.”
• Washington Times, “‘Green’ jobs no longer golden in stimulus: Environmental projects fail to live up to hype“: “Noticeably absent from President Obama‘s latest economic-stimulus package are any further attempts to create jobs through “green” energy projects, reflecting a year in which the administration’s original, loudly trumpeted efforts proved largely unfruitful….The long delays typical with environmentally friendly projects – combined with reports of green stimulus funds being used to create jobs in China and other countries, rather than in the U.S. – appear to have killed the administration’s appetite for pushing green projects as an economic cure.”
• Pittsburgh Post-Gazette, “Economy to occupy Congress“: “On the House side, Democrats will continue to push their ‘Make it in America’ agenda — designed as a boost to U.S. manufacturing and an attempt to restore confidence in the economy. “We need to create an environment from a tax standpoint, a regulatory standpoint and a confidence standpoint that we can make it in America,” said Majority Leader Steny Hoyer, D-Md., in a conference call last week, touting private sector and manufacturing job growth as signs of light, despite the nation’s 9.6 percent unemployment.”
• Los Angeles Times, “U.S. hard-pressed to stem domestic R&D losses“: “President Obama’s proposal to boost the research tax credit for businesses is widely seen as necessary to bolster American competitiveness in the global economy. But even if the $100-billion plan is approved, it won’t begin to address the fundamental questi n of how to turn that research and new technology into jobs and renewed prosperity for Americans.”
• Wall Street Journal, Arthur Brooks and Paul Ryan, “The Size of Government and the Choice This Fall“: [Finding] the right level of government for Americans is simply impossible unless we decide which ideal we prefer: a free enterprise society with a solid but limited safety net, or a cradle-to-grave, redistributive welfare state. Most Americans believe in assisting those temporarily down on their luck and those who cannot help themselves, as well as a public-private system of pensions for a secure retirement. But a clear majority believes that income redistribution and government care should be the exception and not the rule.”
The House today voted 292-126 to return the America COMPETES Act reauthorization bill to committee, including instructions to amend the bill. The Chronicle of Higher Education nicely covers the issues at play (with an obvious emphasis the university R&D angle), “House Republicans Block Bid to Increase Federal Support for Scientific Research“:
A Democrat-led effort to expand federal support for university research hit a roadblock on Thursday when the House of Representatives accepted a Republican proposal to trim spending levels and impose new conditions on the government and on institutions.
The House voted, 292 to 126, in favor of the Republican proposal, effectively halting Democratic plans to pass a five-year renewal of the America Competes Act. Congress first approved the bill in 2007 with the goal of doubling within seven years the total amount of federal spending on long-term basic research.
The hot-button issue pushed by the Republicans was a ban on spending federal money for salaries of employees disciplined for viewing pornography on office computers.
But it would be a mistake to dismiss the criticism of overspending. The public IS worried by federal spending and debt. The Heritage Foundation’s The Foundry blog hit on those points in a post earlier this week, “The America Competes Act: Business-As-Usual in Washington.”
The NAM had issued a Key Vote letter in support of the legislation earlier this week.
John Engler, president of the National Association of Manufacturers, was interviewed by WJR’s Frank Beckman earlier this week, leading up to Engler’s appearances with former Gov. Jim Blanchard to help raise funds for the Michigan Political Leadership Forum.
The interview opens with the expected jousting and joshing on Michigan and Washington politics, but then Frank turns the discussion to the Milken Institute report, “Jobs for America.” Engler observes:
The big 10,000 foot view is that this nation needs to have a growth strategy, and with a growth strategy you end up getting jobs in the private sector. We don’t think there’s such a strategy in place at the moment, and it’s important to recognize that just like the states compete vigorously against each other, nations are now competing against each other.
Our nation really has opted out. It’s sort of like going to the Olympics and not training and hoping that somehow you’re going to win a medal. Not going to happen.
We think you’ve got to get very aggressive. When we look at the competitive environment in the world, you cannot send Michigan or Ohio or even North Carolina or Mississippi out to compete against Singapore or China or Ireland with some of the things that they’re doing to attract business and investment.
I tell people, Frank, that you want the United States to be the best place in the world to locate a company, to headquarter it. You want it to be the best place in the world to do the bulk of your research and development, and them finally, you want it to be a great place to do a lot of manufacturing, and especially to meet the needs of the North American market.
That’s when you get to the idea that taxes matter, regulations matter, the right kind of education or workforce training – all of that matters. Frankly, we’ve got so much room for improvement, and the conversation in Washington is creating lots of risks, lots of doubts, and solving no problems.
Engler and Beckman also discuss health care policy. The full interview is available as a podcast, “Frank talks with Gov. John Engler, who will be in town for the Michigan Political Leadership program at MSU.”
John Engler, president of the National Association of Manufacturers, appeared on Hugh Hewitt’s radio program Tuesday to discuss “Jobs for America,” the new Milken Institute study that details the economic case for policies that will encourage competitiveness and growth of the U.S. manufacturing sector.
HH: Now it’s a great report. It’s almost forty pages long, full of facts, full of details. What’s the key takeaway, Governor? I mean, people should go read it at the Milken Institute website, and I’m sure NAM’s got a link to it, too.
JE: We do, both Milken and NAM have links to this. We’re sending it all over Washington today to every member of Congress, to anybody that we think can influence Congress.
But bottom line, of course, it recognizes I think something your show knows well. Government doesn’t create jobs. Business creates the jobs, and we need to encourage that to happen.
And the report, I think, does something that we’ve needed to do for some time, and I’m just pleased that the NAM could have engaged the Milken Institute to get this done. We really go into the numbers. We dive deeply and say look, if you reduce corporate tax rates, if you make the R & D credit better, make it permanent, if you modernize our system of export controls, guess what’s going to happen? You’re going to create jobs, if we do all three of those things, nearly a million new manufacturing jobs, and nearly three million total jobs right there. And we’re going to add significantly to GDP. This is over a ten year period.
But the implications of this are very clear for Congress. What we need to do is encourage this investment, and get the private sector working. That’s how we get the economy moving.