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Research and Development Tax Credit Important to Massachusetts

Posted by Eileen McAnneny on Sep 22, 2011 11:41:00 AM

A bipartisan group of United States Senators on Monday unveiled a proposal to strengthen and make permanent the federal research and development tax credit before it expires at the end of the year.

Research and Development Tax CreditAnalysts project that increasing the alternative simplified R&D credit from the current 14 percent to 20 percent would spur the creation of 162,000 technology based jobs in the short term and thousands of additional jobs over the long term. Associated Industries of Massachusetts supports the increase because research and technology remains a key driver of the Bay State economy.

Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Republican member Orin Hatch (R-UT) formally introduced the Greater Research Opportunities Tax Help (GROWTH) Act of 2011 at a hearing on Tuesday. Massachusetts Senator John F. Kerry and seven other senators co-sponsored the measure.

“In the1980s the U.S. offered the best research and development incentive in the world. Today, the U.S. credit lags behind incentives offered by many developed countries and that credit has lapsed 14 times,” said Eileen McAnneny, Senior Vice President of Government Affairs at AIM.

“One of the reasons that the Massachusetts economy has out-performed the rest of the nation is a prevalence of research and innovation. Strengthening the R&D credit is therefore a key issue for Massachusetts.”

A new report by Ernst & Young indicates that the R&D credit has a significant impact on private spending:

  • The existing credit is estimated to have increased annual private research spending by $10 billion in the short-term and by $22 billion in the long-term (beyond the first several years), substantially higher than the credit’s roughly $6 billion to $8 billion annual revenue cost.
  • Increasing the simplified credit from 14 percent to 20 percent is estimated to increase annual private research spending by an additional $5 billion in the short-term and an additional $11 billion in the long-term.
  • In total, the overall policy – the existing credit plus strengthening the alternative simplified credit – is estimated to increase annual private research spending by $15 billion in the short-term and $33 billion in the long-term.

Tax-News.com reports that under current law, the R&D provision may be calculated under two methods: a traditional credit and the alternative simplified credit, both of which provide US firms a tax credit for incremental qualifying research expenses, such as labor and equipment costs. The GROWTH bill would simplify and update the research credit by significantly raising the value of the alternative simplified credit from 14 percent to 20 percent of average qualifying research expenses, and by allowing the traditional credit to expire at the end of 2011.

The R&D tax credit was originally enacted in 1981 and has provided an important incentive for private sector investment in innovative research by companies of all sizes and in a variety of industries. But many foreign competitors have instituted more generous R&D incentives in recent years, leaving the United States ranked 24th in research incentives among industrialized countries.

The temporary nature of U.S. R&D incentives is a strain on U.S. companies, causing uncertainty that negatively influences future company R&D budgets. Providing the certainty of a permanent credit, especially in a tax reform environment, is critical to maintaining U.S. leadership in global advanced research and ensuring that U.S. companies will continue to do their R&D here in the U.S.

AIM is supporting passage of the R&D credit renewal as part of a national coalition that also includes many AIM-member companies, including Abbott Laboratories, Intel, Procter & Gamble, Microsoft, EMC, GlaxoSmithKine, Pfizer and Raytheon.

Please email Eileen McAnneny, emcanneny@aimnet.org,  if you would like to receive updates about this issue.

RD.Credit

Topics: Associated Industries of Massachusetts, Taxes, Innovation

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