student loans) for a particular degree as a condition to receiving the degree.

The bill provides that amounts otherwise qualifying for exclusion from gross income as a scholarship or fellowship grant under new Code section 117A would not be includible in gross income merely because of a requirement for performance of teaching services, after completion of the postgraduate course of study, for any of a broad class of qualified educational organizations. For this rule to apply, the recipient also must establish that the amount of the award or grant was used for qualified tuition and related expenses, which would be defined as tuition and fees required for enrollment or attendance, and fees, books, supplies, and equipment required for courses at the educational institution.

Effective date

Section 203 of the bill would apply to taxable years beginning after December 31, 1983.

Senator DURENBERGER. The hearing will come to order. We have a public hearing this morning on foundations, high technology, and depreciation proposals.

Do either of my colleagues have any statements they would like to make before we call the witnesses?

Senator MITCHELL. Mr. Chairman, I do. I have a brief statement I would like to make now, because I will have to leave to go to a meeting of the Environment Committee in a few minutes.

First, I want to congratulate you on scheduling a hearing on S. 2165, the High Technology, Research, and Scientific Education Act, as well as Senator Danforth for his role in this area. I hope this hearing will be followed by prompt action by the committee.

Maintaining and improving our world leadership in technology is an objective that enjoys bipartisan support. Anyone who examines the economic challenges facing our Nation must conclude that steps have to be taken to enhance our economy's capacity to innovate. Essential to any comprehensive program aimed at advancing American research and development capability is conforming the Tax Code to affect unique concerns of innovative companies.

S. 2165 acknowledges the importance of both business and universities in the innovation process. By improving and making permanent the R&D tax credit, the bill should improve the effectiveness of the credit by giving research-intensive businesses greater certainty on the long-term availability of this incentive.

In addition, the proposed credit for business contributions to universities should provide much needed financial support for basic research.

The bill also modifies the tax incentive for the donation of scientific and technical equipment to universities.

I am pleased to have played a role in the enactment of this provision. In 1981, Representative Shannon and I introduced the special deduction which was incorporated into the Economic Recovery Tax Act of 1981.

Improvements included in S. 2165 will enable the equipment-donation incentive to improve both the education of science students and the research done at universities.

While I recognize that tax proposals constitute only one part of an overall program to bolster U.S. research and development efforts, I believe that enactment of S. 2165 should be a high priority, and I hope that the short legislative schedule this year will not prevent us from moving quickly on this important legislation. Thank you very much, Mr. Chairman.

Senator DURENBERGER. Thank you very much.

Senator DANFORTH. I have a statement for the record.

Senator DURENBERGER. Without objection, it will be included in the record.

Our first witnesses are Congressman Zschau and Congressman Chandler.

We appreciate your being here, and your full statements will be made part of the record. You may do with them as you please

STATEMENT OF HON. ED ZSCHAU, U.S. REPRESENTATIVE, STATE OF CALIFORNIA

Mr. ZSCHAU. Thank you very much, Mr. Chairman.

I am Ed Zschau. I represent California's 12th District, which is often called the Silicon Valley area in the United States. There are some 700 high technology companies in my district.

I will be brief. I do appreciate very much the opportunity to voice my strong support for S. 2165. I am a cosponsor of the companion bill in the House, H.R. 4475, introduced by my colleague from Massachusetts, Jim Shannon. I hope that the legislative schedule will permit the passage of this legislation, because I think it is critical to the future of our economy, not just our high technology industries.

Let me make a couple of general comments first. This bill is characterized as a "high technology bill" as it well should be. However, it also can have a dramatic impact on rejuvenating the basic industries in our country that some people have written off. Just because they have lost their competitive edge in certain markets, some people feel that we ought to give up on the smokestack industries, as they are often called. But the worldwide demand for automobiles, steel, and durable goods that those basic industries focus on is not going away. By encouraging research and development, the development of new ideas, we can not only promote our leadership in those areas where we have had a good competitive advantage but we can also improve our competitiveness in those areas where we lost that competitive edge.

There are some people that feel that the way to do this is to establish some sort of a central planning board. In fact, my colleagues on the House Economic Stabilization Subcommittee recently passed out legislation that would create an Industrial Competitiveness Council and an Industrial Competitiveness Bank for targeting by Government of those industries wherein competitiveness has faltered.

I feel that those approaches are doomed to failure. It's difficult enough for those people in the private sector to know where the opportunties are, where the technologies of choice will be.

The proper role of Government, in my opinion, is to create in this country an environment for innovation; to target, if you will, the process of innovation.

There are some prerequisites for such an environment for innovation: We have to have a commitment to basic research, we have to have incentives for the risktakers, we have to have an adequate supply of trained technical people, and we have to have ample market opportunities.

This legislation, S. 2165, would strengthen three of those prerequisites.

By creating additional incentives for corporations to contribute to colleges and universities as well as nonprofit research organizations, we can enhance our capability for basic research in this country. In addition, we can get another very subtle but important benefit-closer cooperation between industry on the one hand and the researchers on the other, so that those ideas that are developed

in the research organizations can find their way into the private sector quickly.

Secondly, by extending and making permanent the R&D tax credits and focusing them on true R&D, we will create greater incentives for corporate risktaking.

I think I should emphasize here that R&D programs are of a long-term nature. When I was in the high technology industry, we would often pursue programs with 5- to 7-year durations. A temporary tax credit does not create incentives for long-term research and development. Therefore, rather than providing a simple extension of the R&D tax credit, I think it is important to make it permanent, so that companies can enter into long term, risky research and development programs knowing that the credit will be there. Finally, we realize that we don't have enough trained technical people in this country. There is a shortfall caused by the great expense of educating such people. By creating incentives for corporations to contribute needed equipment to universities, we can help reduce that shortfall and enable us to be competitive.

I shall conclude by saying that a detailed analysis of this legislation and how it would address these problems is described very well in testimony that you are going to be hearing later by Roger Wellington, representing the American Electronics Association. It has a lot of the details about the problems facing high technology in this country and specifically how this legislation would solve those problems.

Let me just conclude by saying I appreciate the efforts that have gone into this legislation and the holding of the hearings. I think the legislation would be both effective and efficient, and it would deal not just with high technology, where we have had some outstanding performances, but it would enable this country to rejuvenate those industries that have been ailing in the recent past and enable us to create many more jobs for the future.

Senator DURENBERGER. Thank you very much.

Congressman Chandler.

[Congressman Zschau's prepared statement follows:]

PREPARED Statement of ED ZSCHAU

Mr. Chairman, I appreciate the opportunity to appear before these distinguished subcommittees to present my views on the bill S. 2165, the High Technology Research and Scientific Education Act. The issues that are addressed in the bill--refining and making permenant the research and development (R&D) tax credit and providing tax incentives for private sector support of research and science education in our nation's universities--are particularly important to me since I represent the part of Northern California that has become known worldwide as Silicon Valley. There are more than 700 high technology companies--many of them small, start-up firms--in and around my congressional district.

At the onset, I want to express my strong support for the provisions in S. 2165. I am a cosponsor of H.R. 4475--the companion bill in the House--which was introduced by my distinguished colleague from Massachusetts, Congressman Jim Shannon. I want to commend you, Mr. Chairman, for your leadership on this issue and other intiatives to promote U.S. leadership in high technology.