The coalition of about 40 industry lobby groups, which includes the American Electronics Association (AEA) and the National Manufacturers Association (NAM), last week organised a press conference in Washington D.C., to emphasize the importance of the R&D tax credit to companies investing in new technologies. They warned lawmakers that letting the credit expire would blunt US competitiveness, putting thousands of highly paid jobs at risk.

“This tax credit should really be called an investment, as R&D creates wealth, intellectual property, and high-paying jobs in the United States. The lack of a consistent US R&D tax credit makes foreign incentives for R&D much more attractive to companies," Christopher Hansen, the AEA’s President and CEO, observed at the press conference.

“While the US has always maintained a competitive edge in innovation and technology, the global market for R&D is becoming more competitive as countries offer enticing packages for companies to conduct their R&D activities abroad. If the US does not guarantee similar incentives, we will continue to see R&D activities, innovation, and jobs moving offshore. With the strong bipartisan support for the credit, we urge Congress to work together and act on this critical piece of business," Hansen warned.

“The core strength of the US economy is innovation and the R&D tax credit is a critical component,” concurred Jay Timmons, NAM Senior Vice President for Policy. “The credit, with strong bipartisan and bicameral support, is key to keeping and attracting US-based R&D in the current global race for R&D investment dollars. For manufacturers, which claim nearly 70 percent of all R&D credits, R&D drives innovation that translates into new products and increased productivity.”

The sense of urgency on the issue that is felt by industry does not seem to be gripping lawmakers however, and the R&D credit finds itself in legislative limbo for the 13th time since 1981. While the House approved an R&D extension as part of a larger tax package, the Senate has yet to act, and the provisions are now caught in a year-end legislative logjam caused by the legislature's ongoing dispute over alternative minimum tax relief legislation, which also includes several temporary tax 'extenders' such as the R&D credit.

Leading the charge in the Senate for an extension of the R&D credit is Hatch, who, together within Senate Finance Committee Chairman Max Baucus (D-Mont.) is also calling for reform of the credit's provisions.

"Along with being extended, the research credit is in need of some reform," he told the Washington press conference. "A growing problem is the fact that the original, or traditional, credit is calculated using a base period from the mid-1980s. This reference period is becoming more distant and less relevant to more companies each year. In short, the traditional credit is rapidly becoming obsolete."

To address this, Congress last year included an alternative to the traditional credit, called the 'alternative simplified credit.' Instead of referencing the old base period, this credit is based on the company’s most recent three years of research activity. According to Hatch, this new credit has provided a meaningful incentive for firms with significant and growing amounts of research that would not otherwise get much, if any, benefit from the traditional credit.

"Based on discussions with companies that use the research credit, it appears that the alternative simplified credit is now being used by more companies than is the traditional credit," Hatch observed. "Therefore, the bill that Senator Baucus and I introduced this year introduces a change that would phase out the traditional credit, even as we increase the benefits of the alternative simplified credit. We believe this gradual transformation from the traditional credit to a single more relevant and robust credit will create a smooth and generous transition for all companies."

The House bill introduced by Congressmen Sander Levin and Dave Camp is similar to the Hatch-Baucus bill, in that it also increases the alternative simplified credit. However, it does not phase out the traditional credit.

The traditional credit, which is at 20%, would be continued for two more years (2008 and 2009) at the full amount. Beginning in 2010, it would be repealed.

The alternative simplified credit would increase from the current 12% rate to 16% for 2008, 18% for 2009, and 20% for 2010 and thereafter.

However, with the Congressional recess looming, the prospects of getting an extension enacted before the year's end are fading, as the Senate continues to wrangle over AMT offsets. While Republicans are entrenched in their view that temporary tax breaks should not be offset by permanent tax increases, Democrats cannot currently muster enough votes to force the issue.

"I hope that it will be possible to work out a solution this year that would take care of both of these priorities. However, I do not favor offsetting either the AMT patch or the extenders," Hatch stated.

"I believe it is poor tax policy to offset a temporary tax benefit with a permanent tax increase. Moreover, we should not have to raise taxes to prevent taxes from going up," he concluded.