The Metropolitan Policy Program at the Brookings Institution has taken up the task of crafting a constructive response to the “fiscal cliff.” Among other things, it has proposed a modest carbon tax as an alternative for new revenue. It also has called for an independent panel to identify redundant and wasteful federal programs, the recommendations handled by Congress in the up-or-down way of military base-closing commissions.
Much of the attention in Washington has trained on the fate of income tax rates for those households paying at the top of the scale. Yet there are several items related to the tax code set to expire today, the end of the year. None is more important than the tax credit for research and development (or experimentation) in the private sector.
Brookings makes a persuasive argument for making the tax credit permanent, and more, updating and improving its performance.
The credit is an American idea, the United States the first to provide such an incentive for cultivating innovation. The credit has been a success. Brookings notes that many companies are reluctant to invest in research and development, the spillover effect often denying a full return. The tax credit makes the commitment more attractive. It has spurred innovation, jobs and productivity, particularly in metropolitan economies, where 93 percent of the country’s research and development activity and employment resides.
Yet, as Brookings points out, the tax credit has lost punch in recent years. Part of what explains the erosion is that other countries have gotten into the game, diminishing the American advantage in this realm. The Brookings analysis cites a study by the Information Technology and Innovation Foundation that now ranks the United States 27th in terms of the generosity of its incentives for research and development.
Another shortcoming is the complexity of the qualifying requirements, adding to the administrative costs of compliance. In addition, the tax credit has been subject to a cycle of expiration and reauthorization, the fits and starts driven by Congress fueling uncertainty about the credit.
At the same time, the United States slipped as an innovator. Brookings notes one assessment that has this country fourth out of 40 nations in “innovation-based competitiveness” — and second to the last in progress the past decade.
Brookings recommends that Congress enact a permanent tax credit for research and development, or experimentation. Other countries already have taken this step. More, the credit must be simplified and made more generous, moving the rate from 14 percent to 20 percent, at an estimated cost of $6 billion to $8 billion a year. That’s a bargain, in view of the likely dividend, especially for a region such as Northeast Ohio, looking to boost innovation and jobs in advanced manufacturing.
Updating and making permanent the tax credit shouldn’t be hard politically. A wide range of voices have urged such action, from business and labor, liberals and conservatives, from the scientific community. The Government Accountability Office sees the wisdom. No package to address the fiscal cliff is complete without an improved tax credit for research and development.