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It's Time to Reform the R&D Credit

Feb. 21, 2014
"Our citizens want more products that have the logo:   “Designed AND built in the USA.”

The U.S. has been the envy of the world when it comes to innovation.  Our leadership appears to be shrinking, however, and the National Science Board reports that several major Asian economies, led by China, now perform a larger share of global R&D than the U.S. 

Equally troubling is that much of our research currently leaves the lab bench and travels overseas when it comes to actual production.  

If Congress and the Administration want to help reignite innovation, production, and employment here in the U.S., however, they can take steps to extend and revise the research and development tax credit, which would reinvigorate innovation and benefit early stage commercial testing rather than sending it offshore.

When it comes to manufacturing, there is a strong link between research and production.  Scientists want to be close to the shop floor when engineers test the fruits of their creativity and ingenuity.  This research is key to the success of manufacturing and currently claims more than two-thirds of the R&D tax credit for manufacturing enterprises. 

The problem for America’s manufacturers is that, as more production goes offshore, R&D money and research jobs often follow.   This offshored innovation stimulates the next generation of product development and commercialization taking place in other countries.  The current R&D tax credit fails to address this. 

What’s needed is a Research, Development and Deployment (RD&D) Tax Credit that could provide a dramatic boost for American competitiveness and could tip the scales for companies as they decide where to set up not only their production facilities, but their research and development operations as well. 

While the R&D tax credit has been an important tool in accelerating domestic innovation, we increasingly see that jobs dependent on the commercialization of innovation are being awarded to workers in other countries.  

But innovating here and producing outside of the U.S. is a recipe for the further decline of American manufacturing prowess.   Our goal must be to capitalize on innovation by putting domestic workers back to work, and making the most competitive products.

We don’t need more products like the Apple iPhone that say “Designed by Apple in California.   Assembled in China.”   As the iPhone’s assembly moved offshore, so did its suppliers.  Our citizens want more products that have the logo:   “Designed AND built in the USA.”

The RD&D credit can help do that.  In essence, the new RD&D credit would marry a reformed R&D credit with an investment tax credit to help America capture the next generation of innovation and put people back to work.

The answer to this is to update the definition of “research” in order to recognize the significant problems that often exist in moving products from the lab to the shop floor.   This reformed credit would build on a proposal by Congresswoman Donna Edwards that promotes research and development along with domestic manufacturing.  

An RD&D would not only increase the value of the R&D credit, it would also cover expenditures made during early-stage commercial testing.  The key point is that coverage must also expand to include certain expenditures for plant and equipment.   Right now, if a manufacturing property can be depreciated, it is ineligible for the R&D tax benefit.   But stopping tax credits before the preliminary commercial testing of research, just as a company is deciding whether it can be successful, and whether it is going to scale-up production, is a barrier to success.  

Today’s approach just doesn’t make sense in a world where our trading partners are doing everything they can to promote the development of new technologies.   China, for example, committed to spend $1.5 trillion in support of its 12th Five Year Plan, targeted at strategic industries where the U.S. still holds an edge.

The new RD&D approach isn’t about the government picking winners and losers – the private sector will do that.  

But it will ensure that America doesn’t have to be on the losing end when a company is deciding where to produce its products. 

The U.S. can continue to be the world’s leader in innovation while reinvigorating domestic manufacturing, all within the limits set by the World Trade Organization.  In this sense, the RD&D proposal is about picking America as the winner, rather than ceding the fight to our competitors.

Michael Wessel is senior advisor to the Alliance for American Manufacturing (AAM) and a Commissioner on the US-China Economic and Security Review Commission (USCC) serving the organization since 2001. He is also on the board of directors of Goodyear Tire and Rubber.

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