Obama calls for permanent R&D tax credit

U.S. President Barack Obama has called on Congress to approve a permanent research and development tax credit for U.S. companies as part of a multibillion-dollar package intended to jump-start the nation’s economy.

Obama, in a speech in Cleveland Wednesday, asked Congress to make permanent an R&D tax credit that has lapsed 13 times since 1981. 

The tax credit and other proposals will help U.S. companies create jobs, Obama said. “I’ve never believed that it’s government’s role to create jobs or prosperity,” he said. “I believe it’s the drive and the ingenuity of our entrepreneurs, our small businesses, the skill and dedication of our workers, that’s made us the wealthiest nation on earth.”

Obama’s proposal would expand the tax credit from about US$7 billion a year to about $10 billion a year over the next decade. The president’s plan would also change the formula that businesses use to calculate their credit, with companies that use a simplified formula getting a tax credit of 17 per cent of R&D spending, instead of 14 per cent.

The proposal earned praise from several tech groups. Trade groups representing the tech industry have long pushed for a permanent R&D tax credit, but lawmakers have been reluctant to extend the credit because of its cost.

Every dollar spent on the tax credit generates two dollars of economic activity in the U.S., said Rey Ramsey, president and CEO of TechNet, a lobbying group representing tech CEOs. 

“The R&D credit is one of the strongest tools our nation has to spur the cutting-edge innovation that will drive the creation of more American jobs,” Ramsey said. “Now more than ever, American businesses need the certainty that comes with a permanent credit so they can plan their R&D investments over the long term instead of the current practice of yearly start-and-stop.”

A permanent R&D tax credit will help several sectors of U.S. economy, added Evelyn Hirt, president of the Institute of Electrical and Electronics Engineers-USA (IEEE-USA).

A permanent credit “would provide corporations some needed economic predictability in these turbulent times,” she said in a statement. “The technologies U.S. companies develop or improve will ultimately have a positive effect on U.S. competitiveness, the growth of small businesses and job creation.” 

The R&D tax credit would be part of a spending and tax-cuts package estimated to cost $180 billion to $350 billion. The proposal would include new spending for road and bridge repair, tax cuts for middle-class residents and a full tax deduction for capital expenditures at U.S. businesses through the end of 2011.

Obama would pay for the proposal by closing what he called some tax loopholes in other areas. He talked about tax breaks for U.S. corporations that move jobs overseas, apparently targeting rules in the tax code that allow U.S. corporations to pay the overseas tax rate on money earned outside the U.S. if that money stays outside the country.

“One of the keys to job creation is to encourage companies to invest more in the United States,” he said. “But for years, our tax code has actually given billions of dollars in tax breaks that encourage companies to create jobs and profits in other countries. I want to change that.”

The R&D tax credit would replace “tax loopholes that incentivize investment in overseas jobs,” he said.

Obama’s speech in Cleveland comes as many pollsters are predicting huge losses for his party, the Democrats, in November’s congressional elections. Obama ripped into Republicans, saying they have offered no new ideas for improving the economy. 

Obama’s plan may face opposition in Congress. House Republican Leader John Boehner, of Ohio, said Wednesday that Obama’s proposals “fall well short” of what’s needed to address problems of excessive government spending and tax hikes scheduled to happen in January, when cuts pushed by former President George Bush expire. Boehner called for a two-year freeze on tax rates and for legislation that would cut all government spending not related to security back to 2008 levels.

“The American people are asking the question, ‘where are the jobs?'” Boehner said on the Good Morning America television show Wednesday. “If we’re able to do this together, I think we’ll show the American people that we understand what’s going on in the country and we’ll be able to get our economy moving again and get jobs growing in America.”

Tech groups will fight hard for the R&D tax credit, which expired in December and hasn’t been renewed, said Dean Garfield, president and CEO of the Information Technology Industry Council, a tech trade group. 

“I have yet to meet a Democrat or a Republican who is opposed to making the R&D permanent, or at least expanding and improving the R&D credit,” he said. “R&D is really the lifeblood of a knowledge-based economy.”

Ramsey agreed. “This is smart policy and that a wide, bipartisan majority support a permanent credit,” he said. “It would be unfortunate if politics or an election season would not allow approval of this important initiative to spur innovation.”

Grant Gross covers technology and telecom policy in the U.S. government for The IDG News Service. Follow Grant on Twitter at GrantusG. Grant’s e-mail address is [email protected].

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