Many Companies Are Wary of R&D; Plan : Technology: Smaller firms aren’t making enough money to take advantage of tax credits. Bigger organizations see a long-term benefit.
Research and development is the lifeblood of high technology, and, at first blush, President Bush’s plan to make tax credits for R&D; permanent would seem to be a sure-fire valentine for high-technology companies.
In his State of the Union address Tuesday, Bush labeled his plan for the tax credit and increased federal spending on research as part of his long-term approach to encourage those who “explore the promise of emerging technologies.”
And while many high-tech companies do see the tax credits as a long-term benefit, Bush’s more controversial proposal to reduce capital gains taxes is of far greater interest to the young, small companies that fuel job growth.
In biotechnology, for instance, where firms are still dealing with “emerging technologies” a decade after they formed, only a handful are making enough money to take advantage of tax credits; most are losing money.
Companies are still unsure of which kinds of research and development will qualify under Bush’s plan to reduce tax burdens of companies that increase R&D; spending. R&D; tax credits have been approved by Congress on a year-to-year basis since 1986, when the break was reduced to 20% from 25%.
At Calgene, a Davis, Calif.-agricultural biotech firm, Chief Executive Roger Salquist said: “For the small start-up companies that in theory are going to create new jobs and develop new technologies in this country, I don’t think the tax credits are on the decision-making radar screen.” Calgene spent about $12 million last year--or nearly 50% of its revenue--on research.
Jerry Caulder, chief executive of Mycogen, a San Diego biopesticides company, said: “I look at tax credits as good long-term progress--and I’m hoping to get into a position to use them.” But for now, “it’s a subsidy to large companies, to the detriment of small companies” trying to compete.
To Genentech in South San Francisco, where rising sales of genetically engineered health products helped bring 1991 profit to $44.3 million, the credits “are terribly important,” said John McLaughlin, general counsel and vice president. Genentech spent about 50% of its 1991 revenue of $516 million on research.
Analysts said even larger companies, such as Monsanto, Eli Lilly, Merck and IBM, could be helped by the credits. Monsanto, for example, spent more than $600 million on R&D; last year, but that was only 7% of its sales.
Many in the high-tech industry say the President’s pledge to streamline regulations and reduce the tax on capital gains to 15.4% would be a greater boost.
“High-tech companies have to spend the money on research and development anyway,” said Drew Peck, a semiconductor industry analyst for Donaldson, Lufkin & Jenrette in New York. “But capital flowing into high technology is clearly constrained by the onerous capital gains tax rates.”
Indeed, venture capital began drying up after the 1986 tax reform, which taxed capital gains as ordinary income. “As soon as it was changed, funding went way down,” said Mark Heesen, director of research at the National Venture Capital Assn. in Washington.
