Last week we touched on the significance of whether the U.S. House of Representatives and the Senate would extend a research and development tax credit during the final days of the lame duck session. Well, the extension was approved. Here’s what it means for U.S. competitiveness.

The U.S. Congress passed an extension to the R&D tax credit in the closing days of a “lame duck” session. Members of the House and Senate approved extending the credit, which expired at the close of 2005, but did not make it permanent. The law provides a research tax credit equal to 20 percent of the “amount by which a taxpayer’s qualified research expenses for a taxable year exceed its base amount for that year,” according to the Finance Committee’s summary of legislation. Congress will review related legislation when the new session convenes in 2007.

The $16.3 billion incentive — a substantial rise from the $7.1 billion predicted in the tax relief legislation of 2005 — is a cornerstone of broader tax, trade and healthcare legislation, including more than three dozen other renewed tax breaks. It was approved in the final hours of the Republican-controlled Congress.

The law, which takes effect next year, eliminates many barriers to claiming the research credit and is the biggest business tax break to be enacted in more than two years.

For the aerospace industry, Reliable Plant says, “the 109th Congress ended on a high note,” as the new bill’s re-establishment of the R&D tax credit makes the credit retroactive to Jan. 1, 2006, and extends the incentives through Dec. 31, 2007. The bill also introduces an aerospace-friendly alternative simplified credit.

The new provision had bipartisan support among lawmakers who argued that stronger tax incentives in other countries have lured high-paying technology jobs from the U.S.

Over the last 20 years, federal research funding in the physical sciences and engineering has “declined by nearly one-third as a share of the economy,” reports Surface Mount Technology. Meanwhile, China’s research efforts have increased and many companies are relocating R&D closer to manufacturing in China. In fact, according to a report from the Organisation for Economic Co-operation and Development, China has overtaken Japan to become the second biggest spender on R&D behind the U.S. The country is expected to invest $136 billion in R&D this year after growing by more than 20 percent in the past year, the OECD said.

Moreover, according to the commerce department, U.S.-based companies increased research investments abroad by 49 percent between 1998 and 2003, lured in part by aggressive tax incentives in countries such as Canada, France, India, the UK and China. Companies said the new law will help them keep research investment in the U.S.

With secure support for R&D, companies should be able to bolster domestic economies, stay in the country and
benefit society as a whole through discoveries.

Industry organizations such as IEEE call for a permanent credit but note the difficulty of obtaining bipartisan support for a tax bill. The National Association of Manufacturers (NAM), which also supports a permanent credit program for R&D, called the legislation a “seamless extension.”

The R&D Competitiveness Act of 2006, part of the “Agenda for American Competitiveness” put forth by the 2005 Finance Committee of the U.S. Congress, states that Congress aims to “make permanent the research and development tax credit… simplify and improve the existing R&D tax credit,” and provide means for capital to go to research parks and “new markets” start-ups. However, the 2005 R&D tax credit expired at the onset of 2006, and until the extension granted this December, no changes were accomplished.

On a related note, where do you think R&D funding should go?

See also: The Great R&D Dispute

Sources:

Surface Mount Technology

The Economic Times

The National Association of Manufacturers

Reliable Plant