Business unhappy over loss of credit

Tax break on hold for Senate recess


WASHINGTON -- The high-tech industry is furious that the Senate failed to extend a tax credit for research and development costs before departing yesterday for its monthlong summer recess.

The credit, which saves U.S. companies about $7 billion a year by offsetting approximately 6 percent of their research and development expenses, expired Dec. 31. It's used heavily by high-tech firms as well as many traditional manufacturing companies.

Business lobbyists have been pressing Congress to pass a retroactive extension so companies can accurately estimate their taxes and plan research initiatives. But the tax credit is a victim of its own bipartisan popularity.

Republican congressional leaders put an extension and expansion of the tax credit into a controversial bill cutting the estate tax and raising the federal minimum wage in hopes of luring enough support to pass it.

That legislation passed the House, but failed on a procedural vote in the Senate Thursday, killing the research and development tax credit for now. Because of widespread support, Congress is expected to extend the credit sometime this fall.

But waiting until at least September to do so - after congressional leaders vowed quick passage this spring - creates anxiety for companies as other countries are trying to attract U.S. research projects with larger, permanent tax incentives.

"We've become a political football," said Ralph Hellmann, the top lobbyist for the Information Technology Industry Council, a high-tech trade association. "We're extremely frustrated."

Most Republicans and Democrats support the credit. President Bush called for its permanent extension in his State of the Union address this year as a way to boost competitiveness - a call he reiterated last month in a speech to the National Association of Manufacturers.

But the credit, first enacted in 1981 as a short-term economic boost, has been allowed to expire 12 times since then. Congress has never extended it for more than five years. And lobbyists now wonder if they'll ever get a permanent extension, given the trouble they're having getting a short-term one.

Businesses were optimistic about a two-year extension late last year. As part of a complex tax bill, both the House and Senate included similar versions of an extension along with an approximately $2.5 billion expansion of the tax credit that would make more companies eligible.

It was dropped from the bill during House-Senate negotiations in May to keep the legislation from exceeding a $70 billion spending limit. Congressional leaders promised to include the tax credit in a pension reform bill that was enacted Thursday.

They changed course last month. House and Senate leaders removed the research and development tax credit from the pension bill to use it as a "sweetener," along with a higher minimum wage and extensions of some other expiring tax credits, to try to get a cut in the estate tax passed.

The maneuver infuriated business executives, who fired off letters to congressional leaders urging them to change their minds. They didn't.

"It just got caught up in the politics," said Monica McGuire, senior policy director of taxation issues for the National Association of Manufacturers.

Although the research tax credit usually is extended retroactively, McGuire said Congress didn't do that in 1996 after the tax credit had expired 11 months earlier. Businesses lost the credit for that period.

The unpredictability is difficult for companies.

"When you're trying to figure out the cost of your U.S. R&D, does it cost $1 or does it cost 94 cents?" said Karen Myers, a lobbyist for CA Inc., formerly Computer Associates. That's a big deal for a company like CA, which will spend $700 million this year on research and development, she said.

Companies can't assume Congress is going to extend the tax credit and the uncertainty makes it difficult to plan research projects.

"When you make an incentive like this unreliable ... it's putting in people's minds, `Maybe I shouldn't go whole hog,'" said Clint Stretch, who manages tax policy for Deloitte Tax LLP. "That undercuts the effectiveness of the credit."

Jim Puzzanghera writes for the Los Angeles Times.

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