Last week the U.S. Congress Joint Economic Committee published a report urging for a permanent extension of the R&D tax credit. The Credit, enacted in 1981, has not been made permanent and continues to be extended on a short term basis, leading to constant uncertainty. The report points out that the Country’s research and development expenses as a share of GDP are 2.8 percent, which ranks tenth in the world, while a decade ago, it ranked sixth. The report urges Congress to provide “robust, stable funding for research and development” by making the Credit permanent.
The report draws its conclusions from the paramount role businesses play in innovation that leads to sustained economic growth. Businesses account for 63% of all research and development expenditures, while federal government expenditures comprise only 30% of the country’s total research and development expenditures. Budget cuts and sequestration in 2013 have led to declined government spending on research and development activities. As a result, in order to maintain or increase research and development, businesses must be incentivized to continuously engage in such beneficial activities.
Not only does the report urge Congress to make the R&D tax credit permanent, it also recommends passing the Startup Innovation Credit Act (S. 193), which would allow new businesses to benefit from the credit by enabling new businesses to apply the credit against payroll taxes. The report acknowledges that while Congress recently passed a retroactive extension of the R&D tax credit, more legislative stability is needed to spur long term economic growth.