The House is heading toward a Thursday vote on a measure that has often been a matter of little controversy: renewing a tax credit for corporate research that can result in new jobs and industries.
This time around, though, the road for this GOP-crafted legislation isn’t so smooth.
A key reason: Republicans have opened the door to criticism that they’re being fiscally irresponsible. They’re proposing to make the Research & Experimentation (R&E) tax credit permanent without offering any offsetting proposals to keep federal deficits from rising as a result.
The idea of making the incentive permanent has long been supported by many tax policy experts. That’s because firms typically make plans regarding research and investments over a multiyear horizon. If they don’t know that the tax break will stay in place, that uncertainty can limit the ability of the tax break to boost US prosperity.
But pushing the tax credit without paying for it in the budget is politically problematic in the post-recession era of high national debt, and because other Republican proposals, such as a recent plan for comprehensive tax reform, are focused on deficit math.
In debate on the House floor Tuesday, Democrats criticized the GOP proposal as fiscally irresponsible. Some liberal economists say it’s hypocritical for Republicans to be willing to raise deficits for a corporate tax break, while refusing to do the same to extend unemployment benefits designed for the long-term jobless.
Some critics say, moreover, the tax break itself has flaws that should be remedied before it is extended or made permanent.
Rep. Lloyd Doggett (D) of Texas took a dig at “Republicans who claimed to be for fiscal responsibility before they were against it.” He also argued that the tax breaks are too often being abused by companies that are “not about making it in America. They're about taking it from America.”
What’s the Republican counterargument?
Rep. Tom Cole (R) of Oklahoma said Wednesday that the first order of business is to revive the economy and job growth – and that the tax credit is a bipartisan way to help achieve that objective.
“We're never going to get the deficit where we want it to be,” he said, if the economy doesn’t grow at a stronger pace.
The House is expected to vote on the measure Thursday.
Rep. Sander Levin (D) of Michigan spoke for many Democrats who support the tax credit and the notion that it helps the US economy. But “it’s fiscally irresponsible” to make the credit permanent without paying for it, he said.
That view resonates with some independent groups that support controlling America’s debt.
The nonpartisan Committee for a Responsible Federal Budget says both the Democratic-controlled Senate and the Republican-controlled House have been moving – in slightly different ways – to extend tax breaks, including the research one, without paying for them.
That would add to a national debt that’s already historically high, at more than 70 percent of one year’s gross domestic product (GDP).
The R&E tax credit alone would add some $156 billion to federal deficits over 10 years, while other so-called “tax extenders” (tax breaks that are up for review) would cost much more.
“Ideally, these tax provisions should be dealt with in a fiscally-responsible, comprehensive tax reform plan that evaluates each tax break and makes permanent the ones that are worth keeping,” the Committee for a Responsible Federal Budget says on its website this week. “Short of that, however, any short- or long-term extension should abide by pay-as-you-go rules to offset the cost of any tax cuts with reduced spending or increased revenue elsewhere in the budget.”
Many economists view tax credits to promote research as a wise investment of public dollars.
The Obama administration says a higher priority now should be to help some 3 million long-term unemployed Americans by renewing extended benefits that expired at the end of last year.
“The deficit increase [of extending the research credit] is more than fifteen times the cost of the proposed extension of emergency unemployment benefits, which Republicans are insisting be offset,” the White House wrote in a memo to House Republicans Tuesday. The president says he will veto the bill if it reaches his desk, which is unlikely with a Democratic-controlled Senate.
Some policy experts says the tax credit needs reform, not just a rubber stamp, to become a permanent feature of the tax code.
“Created in 1981, the credit immediately became the subject of scandals when it was claimed by businesses that no ordinary American would consider deserving of a tax subsidy (or any government subsidy) for research – like fast food restaurants, fashion designers, and hair stylists,” the group Citizens for Tax Justice wrote in a report last year.
Moreover, by its analysis, much of the dollar value goes to large companies that may not be hurting for funds. About 82 percent of the research credits in 2010 went to firms with revenues of $250 million or more.
Many supporters of the tax credit acknowledge that not all the tax-credit money results in gains for the overall economy.
Currently, a number of corporate activities aren’t eligible for credits, notes another independent group, the Bipartisan Policy Center. “Some expenses that do not qualify … include: efficiency, management, or consumer surveys; research conducted to improve style, taste, cosmetic, or seasonal design factors; research in the social sciences, arts, or humanities; research conducted outside the US,” the group says.
Still, the Bipartisan Policy Center says questions about what qualifies for a tax credit has been “the source of much friction” between the Internal Revenue Service and companies. But the group’s policy analysts conclude that “it is difficult to strike the right balance between ease of administration and ensuring that the credit is properly targeted at activities that would otherwise lack investment.”