Treasury Backs Permanent Research Tax Break Even in Overhaul
The tax incentive for business research should survive an overhaul of the corporate tax code that would prune other tax breaks and lower the 35 percent rate, the U.S. Treasury Department’s top tax policy officials said.
Michael Mundaca, assistant Treasury secretary for tax policy, said that the economic benefits and high-wage jobs generated by the research credit make it worth preserving, even in a tax system with fewer targeted tax incentives.
“In a reformed system, you’d still want some incentives to be provided for research activity, and we think this is a good incentive to provide,” Mark Mazur, the department’s chief tax economist, said at a briefing with reporters in Washington yesterday.
The comments by Mundaca and Mazur came before a scheduled visit today by Treasury Secretary Timothy Geithner to NanoMech, a manufacturing company in Springdale, Arkansas. In addition, the Treasury Department released a study today saying that each dollar spent on the credit by the government generates a dollar in additional research conducted by companies.
In the budget plan President Barack Obama released Feb. 14, the administration proposed making the credit permanent and increasing it. Mundaca said the changes are also designed to encourage more companies to shift to an alternative calculation from the standard research credit, which is based in part on companies’ research spending during the 1980s.
$106.3 Billion Cost
The administration’s proposal would cost the government $106.3 billion in forgone revenue over the next decade, according to the Treasury Department. The administration supports enacting a permanent research credit before a bigger tax bill and would offset that cost with revenue-raising proposals in its budget, Mundaca said.
The credit is not part of permanent tax law, and Congress extends it periodically. It lapsed at the end of 2009 and was not revived retroactively until December 2010, when an extension through 2011 was included in the tax law that also prevented the expiration of the 2001 and 2003 income tax cuts.
The research credit is popular among a range of companies and trade associations. According to the Treasury report, 12,736 companies and more than 64,000 individuals claimed $8.7 billion worth of credits for the 2008 tax year.
Dorothy Coleman, vice president of tax and domestic economic policy at the National Association of Manufacturers, a Washington-based trade group, said the administration’s support for a permanent research and development credit in a revamped tax code was welcome news.
“R&D leads to innovation that leads to technological improvements that help our economic growth, our standing in the global economy and is really so important to our economy overall,” she said.
Some studies, including a Government Accountability Office report in 2009, found that much of the credit’s benefit goes to companies that would perform corporate research in any case. That report said 549 corporations with revenue of more than $1 billion claimed more than half of the total value of the credit in 2005.
The administration’s commitment to extending the credit could make it more difficult to reduce the corporate tax rate from 35 percent, said Joel Slemrod, a professor of economics at the University of Michigan in Ann Arbor, Michigan.
“It technically does make it harder because it’s going to cost revenue,” he said. “If you’re thinking of revenue-neutral tax reform, that’s a trade-off.”
Eliminating the research credit would allow the tax rate to be lowered by between 0.5 percentage points and 1 percentage point without reducing tax revenue, according to data compiled by Bloomberg.
Earlier this week, Mundaca said that another tax proposal backed by many companies -- a temporary reduced rate on profits brought home from overseas -- should not be enacted outside of a broader tax overhaul because it would distract from that effort.
He separated repatriation and research yesterday by focusing on the benefits of the research credit proposal.
“There are benefits outside of what the taxpayer who claims the credit gets,” Mundaca said. “There are general social benefits from the research being done, and this credit addresses one of the market inefficiencies in that companies doing the research can’t always capture the full benefits of the research they conduct.”
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