R.I.P. For R&D Credit?

Here we go again. Since the research and development (R&D) tax credit first took effect in 1981, Congress has allowed it to lapse 11 times. The R&D credit -- providing nearly $5 billion in annual tax credits to an estimated 10,000 U.S. manufacturers, according to an Ernst & Young study -- expired most recently on June 30. Weeks before it expired, the R&D Tax Credit Coalition -- made up of more than 1,000 companies and trade associations -- sounded the alarm and made public statements to put pressure on Congress to extend the credit, which initially was created as a temporary tax credit. Manufacturing lobbyists have attempted numerous times in recent years to make the credit permanent, but they have never succeeded. "Can you imagine if your home mortgage interest deduction lapsed 11 times over the last 20-plus years?" reflects Monica McGuire, senior director for tax policy at the National Association of Manufacturers (NAM), Washington, D.C. "Americans would be outraged." While the expiration of the credit doesn't mean corporate R&D will come to a screeching halt, it does mean companies won't be able to take a tax credit for their R&D operations from July 1 to when and if Congress decides to resurrect it. That might be September, October or later. Despite the on-again, off-again tax credit, there is broad support for it. In March, for example, an amendment was introduced in the Senate to extend the credit through December 2005. The amendment, unanimously approved, also provides an alternative simplified credit that would encourage even more research-intensive businesses to spend more on research in the U.S. "The R&D tax credit seems to be a motherhood-and-apple- pie issue, and there is a lot of support for it, yet Congress allows it to lapse because it gets mired in politics and in other legislative battles," McGuire observes. "It's just the nature of the political beast, especially during a presidential election year. I can't underscore that enough." The R&D amendment is now part of approved Senate bill 1637 and House bill 4520, which will address broader issues involving the foreign sales corporation (FSE) program that provides U.S. companies tax advantages for exporting products. The World Trade Organization (WTO) found the FSE to be an unfair subsidy and allowed countries to began imposing sanctions in March on U.S. products. A House-Senate conference will be held to resolve differences between the House and Senate versions of the bill; the conference may happen after Labor Day weekend when Congress reconvenes from its August recess, but there is talk that it may not come up until the lame duck session in November or December. McGuire is betting it will happen in mid-September or early October because the WTO monetary sanctions are adding up. "There's got to be some real pain felt by many companies who are exporting products, so I think Congress will feel the pressure to resolve the WTO issue," she says. If congressional leaders can't iron out differences, the R&D tax credit amendment may be dropped. If that happens, it means the legislative process for the R&D tax credit will start from square one with a new Congress in January.