Washington – Corporations like Pfizer, United Technologies, Alexion and others spend millions on research each year, hoping to develop new products or processes that contribute to their bottom line.
Of no less significance to their profitability, however, is the tax break government gives them for investing in expensive R&D work.
That’s why a collective of companies from around the country – many Connecticut firms among them – are pushing for Congress to reinstate a key research tax exemption that expired on Dec. 31.
Officially known as the research and experimentation tax credit, it was first enacted in 1981 as part of a financial stimulus package -– as a temporary measure. The last time it was extended was in January of 2013, but the extension was approved only until the end of the year.
Although it was created as a short term stimulus to the economy, a wide range of industries have come to depend on it and don’t’ want to let it go.
No one knows exactly how much tax relief the R&D credit provides, but the Obama administration estimates making it permanent would cost the government about $100 billion over the next ten years.
UTC Chief Executive Officer Louis Chenevert told investors last month that the elimination of the tax credit would reduce the company’s earnings per share by 10 cents.
Connecticut firms are “particularly reliant on that tax break,” says Steven Lanza, executive editor of The Connecticut Economy, a University of Connecticut Department of Economics publication.
Pharmaceutical giant Pfizer’s facility in Groton has developed some of the company’s most popular and profitable products, including the anti-smoking aid Chantix and the anti-depressant Zoloft.
The Groton facility, established in the late 1940s is the company’s largest in a global R&D network, employing more than 3,000 people. Pfizer spent more than $6 billion on R&D last year.
The coalition
Pfizer, United Technologies, General Dynamic –- Electric Boat’s parent company -– and other Connecticut companies belong to a group formed by the National Association of Manufacturers known as the R&D Credit Coalition, whose mission is to protect the R&D tax credit and make it permanent.
The coalition hopes Congress approves an extension of the tax break later this year, perhaps in a massive overhaul of the tax code, and makes that extension retroactive. But that’s a gamble in this unpredictable Congress.
“Uncertainty certainly is a problem. Companies need to know the credit will be around,” said Christina Crooks, the R&D Credit Coalition’s executive secretary.
The R&D credit was just one of 55 temporary tax breaks to expire on Dec. 31. They are known as “extenders” because their temporary nature requires them to be periodically extended by Congress to survive.
The full array includes tax relief for homeowners whose mortgages are “upside down,” a credit for wind farms that generate electricity, the ability to donate money from an IRA tax-free and a deduction for commuters who take the bus to work. Another, called the “NASCAR loophole” would allow anyone who builds a racetrack to receive benefit through accelerated depreciation of assets on tax returns.
But extending the tax breaks — including the R&D tax credit — costs money, at least $50 billion per year, according to estimates by the Center on Budget and Policy Priorities. They would bloat the deficit unless they’re offset with tax hikes or spending cuts elsewhere.
Rep. John Larson, D-1st District, who sits on the Ways and Means Committee, a panel with jurisdiction over tax issues, is a chief sponsor of a bill that would make the R&D tax credit permanent.
“Looking ahead, it is crucial that any talks of reforming our tax code include this important credit,” he said.
Catherine London, spokeswoman for Cheshire-based Alexion pharmaceuticals, said chronic uncertainty over the status of the tax break every year hurts the ability of companies to plan. Like most other companies that invest heavily in R&D, Alexion would like to make the credit permanent.
“That would show a much bigger commitment to our industry,” she said.
Practical problems
But even an extension of the tax break could pose a problem this year, even as it has wide bipartisan support and is one of the most popular “extenders.” (A recent article in Forbes called it ”a close third to motherhood and apple pie when it comes to support in Washington, D.C.”)
Sen. Max Baucus, D-Mont., the head of the Senate Finance Committee, is drafting a tax overhaul that would be the perfect vehicle to extend the R&D credit – and perhaps even make it permanent. But he has been tapped by President Obama as the next U.S. ambassador to China. Most lobbyists say it’s unlikely Baucus will have time to finish his work.
Baucus’ counterpart in the House, Ways and Means Committee Chairman David Camp, R-Mich., is also struggling to bring tax reform to the forefront of the House leadership agenda.
But companies like Pfizer and Alexion have made the R&D tax break a priority; and Connecticut companies would be harmed disproportionately by the demise of the tax break, Lanza said. “Connecticut companies do more of that stuff than those in any other state in the nation,” he said.
In fact, he said, companies over the years have developed “a sense of entitlement” to the tax break, even though it was meant to be a temporary boost to the U.S. economy.
Lanza said the end of the tax break would also make it less attractive for businesses to partner with the University of Connecticut on research and development projects, as is the case with Jackson Labs.
Erin Crew, spokeswoman for Boehringer Ingelheim, a German pharmaceutical whose U.S. operations are based in Ridgefield, said the tax break helps her company “maintain high levels of investment in research and development.”
“We invest nearly one-quarter of our annual net sales back into R&D, which we believe is critical at a time when many companies are scaling back their investments,” she said.
The R&D Credit Coalition says the manufacturing sector of the United States generates more than $1.6 trillion in Gross Domestic Product each year. They warn there are many other countries that offer more attractive R&D incentives -– and lower corporate tax rates -– and U.S. companies could resettle abroad. On the other hand, the coalition says if the credit were strengthened and made permanent, total employment would increase by 510,000 within a decade.
Connecticut is one of 38 states that have also established an R&D tax break in an effort to compete for high-tech companies. Ironically, Lanza said, the prevalence of companies in the state that rely on innovation and investment in research capital, instead of expansion through the hiring of large number of workers, “is part of the evidence that we don’t’ grow a lot of jobs.”