The Ripon Forum

Volume 42, No. 1

Feb - March 2008

Incentive and Inventive

By on November 17, 2015

Smart Tax Policy Needed to Promote U.S. Manufacturing


It’s a comment many of us heard in our early years on the job, delivered by a demanding boss or exasperated coworker: “Work smarter, not harder!”

Manufacturers in the United States take those words to heart. They have to.

Although no strangers to hard work, America’s manufacturers know that their competitive advantage in the hard-fought global marketplace lies in the ability to work smarter. Other countries will boast lower costs of labor or raw materials, so it’s skilled and creative people who ensure America’s competitive edge – the edge that builds on research, development, investment and innovation.

For many years, a bipartisan consensus in Congress has helped maintain that American edge. Republicans and Democrats both have supported smart policies that encouraged the R&D and innovation that lead to new products, technologies and manufacturing processes. Yet year after year, Congress still does a dumb thing: It allows the federal research and development tax credit to expire, throwing U.S.-based business into a world of uncertainty and frustration.

10“The U.S. is in real danger of losing our lead in research to other countries,” Senator Orrin Hatch (R-UT) warned at a December 2007 news conference on Capitol Hill. “Many of these nations offer more generous tax incentives than we do. We simply cannot afford to lose the edge in research and development.”

Despite the Senator’s admonition, the R&D tax credit lapsed on December 31, 2007 – the 13th time that Congress has permitted the credit to expire since its creation in 1981. This kind of on-again, off-again inconsistency is the enemy of investment, especially in the case of R&D conducted by manufacturers, projects which typically span five to 10 years. But the credit’s expiration also amounted to an immediate $9 billion tax hike for the nearly 11,000 companies of all sizes that use the credit – at the very same time that Congress and the President were embracing tax relief to stimulate the economy.

Allowing the credit to expire also creates a huge competitive disadvantage. Once providing the most attractive incentive in the industrialized world, the United States now ranks last among the 20 OECD countries that stimulate R&D through their tax codes. With decisions about jobs, facilities and investments increasingly made on a global scale, the United States simply cannot afford to come in last in any competitive area.

This incentive is especially critical to manufacturers, the primary innovators of the U.S. economy who claim nearly 70 percent of all R&D tax credits. Manufacturers have proved that R&D is a powerful force driving new product development and increased productivity – again, competitive advantages we must not let slip away.

… the United States now ranks last among the 20 OECD countries that stimulates R&D through their tax codes.

Between 1994 and 2004, manufacturing productivity increased by 60 percent, primarily due to innovation and technological advances. These advances spurred the nation’s economic growth, resulting in spillover benefits to American workers in terms of higher wages and an improved standard of living.

Other countries have learned from our example, improving their credits and other incentives to attract R&D jobs, projects and facilities. Canada, China, India, France and Ireland are just some of the countries that court U.S. companies by advertising more advantageous R&D tax incentives. Not surprisingly, one survey by Deloitte Consulting found that R&D investments by U.S. majority-owned companies increased more than twice as fast in foreign countries as they did here at home between 1998 and 2003.

Congress is certainly aware of these competitive challenges. In passing an extension of the credit in 2006, lawmakers created a new, simplified version of the incentive – one especially beneficial to small- and medium-sized manufacturers.

“To keep our nation leading the world in technology and innovation, we’re extending and modernizing the research and development tax credit,” President Bush said upon signing the bill into law. “By allowing businesses to deduct part of their R&D investments from their taxes, this bill will continue to encourage American companies to pursue innovative products, medicines, and technologies.”

Last spring U.S. Representatives Sandy Levin (D-MI) and Dave Camp (R-MI) introduced legislation to further strengthen the credit, and make the R&D tax credit permanent. In 2007, there were a record-breaking number of original cosponsors on the bill, all of whom are members of the House tax-writing committee in Congress, reinforcing the broad bipartisan support for innovation in Congress. Given that support and the R&D tax credit’s proven effectiveness, how is it that Congress allows it to expire – now for the unlucky 13th time? It’s not as if the legislators do not hear from their business constituents and trade associations, including the Information Technology Association of America, the Business Software Alliance and, of course, the National Association of Manufacturers.

Unfortunately, the research and development tax credit is so popular, so effective, that it has become a favored bit of legislative sweetener. It gets added to this measure or that, often in the waning days of a Congressional session, to attract a few more votes. When the credit lapses, the business community hears assurances like, “We’ll get it done…eventually. Don’t worry.”

But manufacturers and businesses in the United States do worry. They worry when they open the paper to a full-page advertisement meant to lure companies abroad; when they start to plan a product’s development, not knowing whether a credit will be in place; when they learn of a foreign competitor’s breakthrough and great new product, developed through government-encouraged R&D.

In today’s global economy, competition is a given and complacency the enemy. The time has come to recognize the R&D tax credit as a critical element of American competitiveness, one that should be a permanent feature of the U.S. tax code. It’s the smart thing to do. RF 

John Engler, a former three-term Republican governor of Michigan, is president and CEO of the National Association of Manufacturers.

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