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The U.S. Economy Needs a Permanent Research Tax Credit

The Research Credit, enacted over 30 years ago, was the country’s first tax credit for research by businesses.  During that time, the tax credit has lapsed and then been renewed 13 different times. It has been widely recognized that the credit encourages investment in innovations that produce economic as well as social benefits to the U.S. Politically, the credit has always enjoyed widespread bipartisan support.

When the credit was first launched in 1980, it was the most generous research incentives in the world. Since that time the credit has fallen to 23rd place among the 38 countries in the Organization for Economic Development and Cooperation (OECD) and the seven emerging countries. The U.S. now ranks 8th in private R&D expenditures as a share of economic output.

Each time the Research Credit has been allowed to expire, businesses have struggled to adjust business plans and deal with the uncertainties related to recognizing tax benefits. Currently, the Research Credit is scheduled to expire December 31, 2011.

As part of his pre-election push to spur a slumping economy, President Obama has stated that the country needs a permanent Research Credit. In addition to advocating that the credit be made permanent, Obama proposes to increase the Alternative Simplified Credit from 14 percent to 17 percent.

“The R&D Tax Credit creates high-wage American Jobs,” the United States Chamber of Commerce says on its website, because at least 70 percent of the tax benefits are attributable to salaries for those doing the research, and only research actually performed within the United States is eligible.

Though nothing is certain on Capitol Hill (especially now), experts say it is likely the Research Credit will be extended at least temporarily, given its bipartisan popularity and pro-job appeal. This is a very good time for companies, particularly those who haven’t taken advantage of the credit before, to determine whether they could qualify. It is important to keep in mind, that no matter what happens on the federal level, that many states offer similar R&D tax credits.