Deal Struck to Extend R&D; Tax Credit for 5 More Years

High-technology industries scored a significant victory in a deal struck by White House and congressional negotiators this week to extend for five years a tax credit meant to spur investment in research and development.

The deal, expected to be approved within days as this year’s congressional session winds up, stopped short of what the business community has long coveted--a permanent extension of the credit.

But business leaders who lobbied the issue say stabilizing a tax credit that since its inception in 1981 has been extended nine times--often for a year at a time and never for more than three years--is crucial for long-term planning of experimental research.

“This is decidedly good news for us,” said Walter Moore, a Washington lobbyist for Genentech Inc., a biotech company based in South San Francisco.

In practical terms, a five-year tax-credit extension could help a company such as Genentech to test and introduce more prospective drugs during long-term human clinical trials. “That has a decided public benefit--and obviously there’s an economic benefit,” Moore said.

In its original budget for fiscal 2000, the Clinton administration had proposed only a one-year extension of the R&D; credit, which expired on June 30. The provision gives businesses a 20% credit on their taxes for qualified expenses above a base amount.

California, with its large concentration of high-tech industries in Silicon Valley and Southern California, has perhaps more to gain through the tax credit than any other state. Every year, the state’s lawmakers and lobbyists promote the issue relentlessly.

Rep. Robert T. Matsui (D-Sacramento), a senior member of the House Ways and Means Committee, sponsored a bill this year to make the credit permanent, and dozens of colleagues from both major parties in the state signed on to the effort. It’s another sign of Silicon Valley’s growing political cachet.

“The high-tech community is becoming the new darling of the Washington political scene,” Matsui said. “Everybody wants to get their support. That’s what’s going on right now.”

Key companies lobbying on the issue have included Microsoft Corp., Boeing Co. and United Technologies Corp., which have been leaders in creating an R&D; Credit Coalition, representing a thousand companies and dozens of trade associations. “No other issue on the legislative horizon means more to our member companies,” said Caroline Graves Hurley, of the Washington-based American Electronics Assn., a member of the coalition.

A recent study for the R&D; coalition by the consulting firm Coopers & Lybrand found that making the tax credit permanent would spur U.S. companies to invest an additional $40 billion over 12 years, raising overall productivity and generating a high rate of return that would benefit the entire economy.

What has held up the push to make the credit permanent is not politics but money--or rather the lack of it.

Lawmakers say they are reluctant to forgo billions of dollars in revenue each year unless they can find a way to cut the budget elsewhere. This week’s deal on the R&D; tax credit, packaged with other modest tax breaks, would cost the government an estimated $16 billion over five years.

It was unclear Wednesday night when the tax package might come to a vote. The timing hinged on the status of budget legislation needed to keep the government operating over the next year.

Business leaders were anxious Wednesday to see the bill’s fine print. It appeared that congressional negotiators--to minimize the immediate impact on federal coffers--were using some of the same accounting gimmicks that have pervaded this year’s budget talks.

For instance, congressional aides said, the deal stipulates that companies would not be able to claim retroactively from June 1999 the first 15 months’ worth of the tax-credit extension until Oct. 1, which is the first day of the next fiscal year. A similar ruse would apply in the succeeding fiscal year.

Besides the R&D; credit, other elements of the tax package include:

* A two-year extension of a federal program that allows school districts to obtain interest-free loans to help build and renovate schools. The program, which has benefited Los Angeles Unified School District and others with significant numbers of students in poverty, would funnel about $120 million into California schools over two years;

* A 2 1/2-year extension of a welfare-to-work tax credit for businesses;

* A three-year extension of a break that allows many affluent families to avoid higher taxes under the government’s so-called alternative minimum tax.