The R&D tax credit is being held hostage to estate tax. As the Washington Post explains:
Republican leaders in Congress have long wanted to eliminate or slash the taxes levied on estates left by wealthy people, but the Senate has repeatedly refused. Hoping to attract enough Democratic support, House leaders last week added a sweetener: the first increase in the federal minimum wage in nine years, plus an extension of several popular tax breaks for businesses. The House passed the complex measure -- dubbed "the trifecta" because of its three main facets -- and sent it to the Senate, which planned to vote before adjourning this weekend for the August break.
The R&D tax credit extension was one of those in the package. The bill would also have made permanent the prevision from last year's tax bill allowing the sale of songs to be treated as a capital gain rather than income – as I wrote about earlier.
However, last night the tactic failed as the Senate refused to vote to end debate on the legislation. (Interestingly, the failure may be due more to the issue of how to adjust or not adjust the minimum wage for tips than any other issue - as the Post story points out).
But even if the bill had passed, the issue of the R&D tax credit would be far from over. The bill includes only a two year extension retroactive to Dec 31 2005 - extending it to the end of 2007!
R&D tax credit is an example of how Washington can’t seem to get beyond the agenda of the 1980’s. It should have been made permanent decades ago. And we now should be conducting a review of its effectiveness – with an eye to crafting an incentive for innovation, not just R&D.
Instead, we are mired in a situation where the incentive is not a powerful as it should be because companies can’t plan on it being there from year to year. In addition, the nature of innovation has moved well beyond the types of activities that are rewarded under the law. The tax credit doesn't apply to many sectors of the economy where innovation is not the result of traditional R&D.
We need to move beyond the old ideas and address the competitive issues of today. Instead, we are replaying over and over again the fights of two decades ago.
Frustrating – really frustrating.
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