Tech Firms Are Riled Up Over Tax Credit

The technology industry is furious that the U.S. Senate failed to extend a tax credit for research and development costs before departing Friday for its monthlong summer recess.

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

Business lobbyists have been pressing Congress to pass a retroactive extension to enable companies to accurately estimate their taxes and plan research initiatives as well as help their bottom lines. But the 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 the hope of luring enough backing to get the bill passed.

The legislation passed the House but failed on procedural vote in the Senate on Thursday, killing the R&D; tax credit for now. Because of its broad support, the credit is likely to be extended by Congress sometime this fall.

But the long delay -- after congressional leaders vowed quick passage in the spring -- is making companies anxious as other countries try to attract U.S. research projects with larger and permanent tax incentives.

“We’ve become a political football,” said Ralph Hellmann, the top lobbyist for the Information Technology Industry Council. “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 in January as a way to improve competitiveness, a call he reiterated last month in a speech to the National Assn. 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. Now, lobbyists are wondering if they’ll ever get a permanent extension considering the trouble they’re having nailing down a short-term one.

Businesses were optimistic about a two-year extension late last year. As part of a complex tax bill, the House and Senate included similar versions of an extension along with an approximately $2.5-billion expansion of the credit that would have made 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 headed toward passage.

They changed course last month. Leading Republican lawmakers removed the tax credit from the pension bill to use it as a “sweetener,” along with a minimum wage hike and extensions of other expiring tax credits, to pass an estate-tax cut.

The maneuver infuriated executives, who fired off letters urging congressional leaders 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 Assn. of Manufacturers.

Although the research tax credit usually is extended retroactively, McGuire said Congress didn’t do that in 1996, after it had been expired for 11 months. For that period, the credit was simply lost.

Dealing with the unpredictability can be difficult.

“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 such as CA, which will spend $700 million on research and development this year, she said.

Companies can’t make the assumption in their financial statements that Congress is going to extend the tax credit. And the uncertainty makes it challenging 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. “That undercuts the effectiveness of the credit.”