This week, the House will consider permanent tax relief legislation for American employers. H.R. 4438, the “American Research and Competitiveness Act of 2014,” would make permanent a 20 percent tax credit for qualified research and experimentation expenses (wages, supplies, contract research, and basic research costs).
Americans for Tax Reform supports this legislation and urges all pro-taxpayer Members of Congress to vote for it.
H.R. 4438 is permanent tax relief for American employers. This research credit has been a part of the tax code since the 1981 Reagan tax cut. Because it has always been temporary, Congress has had to renew it some 14 times. The uncertainty created by its expiration date (the credit expired on December 31, 2013) makes business planning difficult. It’s better to have this tax provision be the permanent part of tax law that it de facto has been for over three decades.
The research credit is a good placeholder for comprehensive business tax reform. The United States imposes the highest corporate income tax rate in the developed world, at nearly 40 percent including states. Unincorporated businesses are even worse off, with a combined federal-state rate approaching 50 percent. The research credit is one of the few ways American employers can cope with these sky-high tax rates. Until such time as these rates can come down, the research credit is an essential part of keeping our employers competitive internationally.
Investment in new technologies and sources of capital is under pressure from other areas of the tax code. If you didn’t know any better, you would think the U.S. income tax code is actually biased against new investment in technology. We’ve already mentioned how the U.S. has the highest business tax rates in the developed world. Couple that with a capital gains and dividends tax rate that just rose from 15 to 23.8 percent. Pair that with a cost recovery system that makes a company depreciate a computer over 5 years when real-world technology makes it obsolete in half that time. Throw in one of the only tax codes that exposes our own companies to international double taxation. What you have left is not much to sell.
This tax credit for research and experimentation is one of the few tax code provisions actually aimed at encouraging new capital investment and growth. To lose it without taking care of the basic tax code anti-growth bias first would be the wrong move for Congress.