Abstract: President Obama's New R&D Plan

From the White House:


EXPANDED, SIMPLIFIED AND PERMANENT RESEARCH AND EXPERIMENTATION TAX CREDIT


The Obama Administration recently issued a press release detailing his plans to extend the R&D tax credit permanently. The President's plan specifically proposes to expand the credit, simplify it, and make it permanent. A quick summary and then some brief thoughts of my own follow.



Summary


Expand the Credit

• The administrations plan is to expand the credit by 20%. The Administration estimates that this would devote about $100 billion dollars over the next years to leverage R&D investment. 
• Eligible research would take place only in the United States, which would keep high-tech jobs here.

Simplify the Credit

• Currently businesses choose between two different formulas for calculating their R&D credit. A very complex one that provides a 20% credit for investments over a certain number, and a simpler one that provides a 14% credit in excess of a base amount
• The Administration proposes to bump the value of the simpler formula to 17% which theoretically would make it more attractive to businesses and thus simplify the credit. 

Make the Credit Permanent (humorously stated as "Permanent the Credit" on the official release)

• This one speaks for itself, the plan would make the credit permanent.
• The Administration proposes paying for it fully by "closing loopholes" and other measures proposed in the FY 2011 budget 

What do we make of all of this?


Obviously the plainest benefit from making the tax credit permanent is increased business certainty. The credit as been extended 13 times since its creation in 1981. Making the credit permanent would likely give businesses the confidence they need to continue and accelerate investments in R&D. Currently the R&D tax credit is subject to the political whims of a fickle legislature. Specifically during election years the uncertain nature of the credit is most apparent, with Democrats* and Republicans* blocking legislation to to permanently extend the bill (depending on how it was packaged, of course).

 *(I also have a tendency to think that one side is being more disingenuous in its blocking of the R&D tax credit this particular election cycle but in keeping of the non-partisan spirit of this blog, I will refrain from making naming names.)

This isn't the first time the credit has been proposed to be permanent. There were several bills floating around Congress last year (S. 1203 and H.R 422) that proposed to do similar things to the credit that the Administrations plan does now. My only pet peeve? Why not just throw out the two formula system, give every business the 20% simple tax credit (like S. 1203 and HR 422 proposed) and then actually simplify the credit? Although, I am of the mind that any permanent tax credit is better than the mess we have currently, having had 13 extensions since 1981, and having the last extension expire in December of 2009. We'll see if Congress can pass the credit once and for all this time.