Senate republicans and democrats continue to have major differences over tax legislation, which is holding up retroactive extension of the Research and Development Tax Credit which expired in December 2007. SEMA and other groups have been lobbying Congress to restore the tax credit and make it permanent. While there is general agreement that the credit should be renewed, there is disagreement on how it should be financed. The democrats want to pay for the credits with revenue-raising measures that are generally opposed by Senate republicans. The House has already passed its version of the legislation, which contains revenue offsets.
The current battle in the Senate over the R&D tax credit raises larger questions about the use of temporary tax credits. SEMA has long contended that tax credits with a clear benefit to the development of national technological and industrial base should be made permanent. From Congress’ perspective, however, building in an expiration date provides greater flexibility in setting tax policy and setting limits on lost federal revenue from the credit.
Congress could, in theory, decide to withdraw the credit, letting it expire and taking no action to renew it. In practice, the R&D tax credit and other similar business tax credits are renewed year after year, but often only after long debate, causing uncertainty and upsetting private sector R&D planning.
The tax credit offsets R&D costs for companies that invest time and money before they are able to produce new products. The research must be technological in nature and aimed at introducing a new or improved product based on function, performance, reliability or quality. Monies may be spent on both in-house and outside research. The credit is generally 20% of funds spent above the "base period amount" or, as of 2010, scheduled to be 20% for expenses that are 50% above the average over the past three years.
For more information, contact Brian Duggan at briand@sema.org.