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sure what the tax consequences will be. The companies in my district tell me that their planning cycle for R&D runs about 3 to 5 years, with the heaviest expenditures occurring in the last years. This means that companies are already planning now for the expenditures that will fall beyond that sunset date. And given the possibility that the credit will not be extended beyond that date, many of these companies will inevitably decide against further increases in R&D spending. In fact, one reason why it does not make sense to wait for more data before extending the credit is that given this 3- to 5-year cycle, spending decisions may already be being affected by uncertainty over the sunset, making the effect of the credit appear to be less than it really is.
Another argument might be that we should wait and see what the economy looks like before extending the credit. We have all been worrying about what the deficit is going to look like in the out years, and there has been talk about making sure that taxes aren't cut any further during those years. The R&D tax credit is estimated to cost close to $1 billion a year, and I understand that a study by the National Science Foundation raises the possibility that the revenue loss will be greater. But whether the figure is $1 billion or $2 billion, I think that the benefits of the credit are well worth the price. This is a cost-effective measure. The returns to the economy in increased productivity, innovation, and competitiveness could far exceed the cost of providing the incentive. By contrast, the ACRS and leasing provisions, even after TEFRA, will cost us $16 billion this year and $29 billion in 1985, and the economic benefits have proven to be uncertain at best.
The R&D tax credit is a perfect example of how a good tax expenditure should work. It is specifically targeted. It is cost effective. It provides a clear signal of a Government policy on which there is a widespread consensus. But if it continues to be hampered by the sunset provision, it cannot, because of the resulting uncertainty, continue to work in the manner in which it was intended, and its beneficial effects may be only temporary. It is essential that we act now to keep this important provision in place as a permanent part of the tax code.
I want to thank you, Senator, for your leadership in this effort and say that I look forward to working with you, whether we have a big revenue bill this year or not, and seeing that the credit is improved and extended.
Senator DANFORTH. Thank you very much, Congressman Shannon. You have certainly been the leader in this area, and I think you have given us very powerful testimony, first of all, from your own knowledge of businesses in your district. Your belief, as I understand it, is that they have used the credit and it has been a positive incentive for research and development spending, and, but for the credit, it is unlikely that they would have done as much in R&D; and, second, your very strong position that the credit should be made permanent and not just a temporary extension.
We, I think, used to pass revenue bills about once every 7 years or so around here. Now we pass them every year. And one of the things that it does is remove any sense of certainty at all. Who knows how to plan anything if Congress is constantly fiddling around with the tax laws? It is my understanding of your view that
this is the time for us to set out a long-term program, not just a short, 2- or 3-year extension, but something that businesses can really plan on.
Congressman SHANNON. That's right.
Senator DANFORTH. And making their own programs, hiring personnel, all of the things that they have to do to have an effective research effort.
Congressman SHANNON. That's right. I think that the great success in the economy in my area of the country has been a result of long-term planning and a willingness to look several years down the road and try to anticipate what products would be marketable several years down the road. And if we want to encourage that and want to see other industries do it, I think that we have got to really create some certainty about how much can be spent on R&D, and if we can make this credit permanent or extend it for a good period of time, I think that we really have a chance of assisting that recovery and, just as importantly, probably assisting the effort at getting the economy to make the transitions that are coming anyway and make them as smoothly as possible. That is why I think that what we do with the R&D credit this year is very important.
Senator DANFORTH. Thank you very much. Senator Heinz?
Congressman SHANNON. Thank you very much.
Senator DANFORTH. Thank you, Congressman Shannon.
[The prepared written statement of Congressman Shannon follows:]
THE HONORABLE JAMES M. SHANNON
SENATE COMMITTEE ON FINANCE
MR. CHAIRMAN AND MEMBERS OF THE COMMITTEE, I VERY MUCH APPRECIATE THE OPPORTUNITY TO APPEAR BEFORE YOU AND DISCUSS THE LEGISLATION WHICH YOU ARE CONSIDERING TODAY. ALL OF THESE BILLS ARE GOOD ONES, AND I HOPE THAT THE COMMITTEE WILL GIVE THEM FAVORABLE CONSIDERATION. S. 1194 AND S. 1195 ARE SIMILAR TO LEGISLATION I HAVE INTRODUCED IN THE HOUSE. THIS LEGISLATION WILL FURTHER THE PROGRESS WE HAVE STARTED TO MAKE IN GETTING EDUCATIONAL INSTITUTIONS AND PRIVATE BUSINESSES TOGETHER TO UPGRADE THE SCIENTIFIC AND TECHNICAL TRAINING OFFERED TO THE STUDENTS WHO WILL COMPRISE OUR FUTURE WORKFORCE.
AS AN ORIGINAL COSPONSOR OF THE TAX CREDIT FOR INCREMENTAL RESEARCH AND DEVELOPMENT EXPENDITURES, HOWEVER, I WOULD LIKE TO FOCUS ON S. 738, THE PESEARCH INCENTIVES CONTINUATION ACT OF 1983, WHICH WOULD ELIMINATE THE 1985 SUNSET ON THIS TAX CREDIT AND MAKE IT PERMANENT. I CONSIDER THIS TO BE ONE OF THE MOST IMPORTANT PIECES OF LEGISLATION BEFORE CONGRESS THIS YEAR.
IN ORDER TO UNDERSTAND WHY THE R&D TAX CREDIT IS SO IMPORTANT, IT IS HELPFUL
ADDING TO THIS PROBLEM WAS THE FACT THAT WE WERE IN A PERIOD OF HIGH INTEREST RATES, DISCOURAGING ALL TYPES OF INVESTMENT. THIS WAS ESPECIALLY TRUE OF R&D, WHERE THE PAYOFF FROM INVESTMENT, IF ANY, IS NOT IMMEDIATE AND CONCRETE BUT LONG-TERM AND UNCERTAIN. AND THE ACRS PROVISIONS THAT WERE PROPOSED AND ENACTED IN THE SAME YEAR DID VERY LITTLE FOR THE INNOVATIVE HIGH TECHNOLOGY COMPANIES WHOSE GROWTH WOULD BE MOST IMPORTANT TO THE FUTURE OF OUR ECONOMY, BECAUSE THE ACTUAL DEPRECIATION LIVES OF THEIR PRINCIPAL ASSETS WERE ALREADY AS SHORT AS THE SHORTEST ACRS LIVES.
THIS IS THE SITUATION THAT THE R&D TAX CREDIT WAS INTENDED TO ADDRESS, AND THE SITUATION THAT, TO A GREAT EXTENT, CONTINUES TO EXIST. ONE OF THE BEST FEATURES OF THE CREDIT IS THAT IT IS SPECIFICALLY DESIGNED TO ADDRESS THIS SITUATION. THE CREDIT IS ONLY FOR INCREASES IN R&D SPENDING; COMPANIES THAT SIMPLY MAINTAIN THEIR CURRENT LEVEL OF SPENDING AND DON'T TRY FOR REAL INNOVATION WILL NOT BE ABLE TO UTILIZE IT. THUS, IF THE INCENTIVE WORKS AS INTENDED, WE SHOULD SEE THOSE R&D FIGURES START TO MOVE OFF THEIR PLATEAU AND START GOING UP AGAIN.
IT'S A LITTLE EARLY YET TO BE ABLE TO TELL FOR SURE WHETHER THE TAX CREDIT IS HAVING ITS INTENDED EFFECT. TAX RETURNS FOR THE YEARS IN WHICH IT HAS BEEN IN EFFECT HAVE ONLY JUST BEGUN TO BE ANALYZED. REGULATIONS FOR THIS PROVISION WERE ONLY ISSUED LAST JANUARY AND ARE NOT YET FINAL, CREATING AN UNCERTAINTY WHICH MAY BE DETERRING SOME COMPANIES FROM USING THE CREDIT.
HOWEVER, THE INDICATIONS SO FAR ARE ENCOURAGING.
EVERY YEAR, THE MCGRAW HILL COMPANY TAKES A SURVEY OF BUSINESS' PLANS FOR CURRENT AND FUTURE RESEARCH AND DEVELOPMENT EXPENDITURES. THIS YEAR'S SURVEY HAS JUST COME OUT, AND WHILE IT IS NOT QUITE AS OPTIMISTIC AS LAST YEAR'S PROJECTIONS, IT STILL CONTAINS GOOD NEWS ON THE R&D FRONT. DURING 1981
R&D EXPENDITURES BY THE MORE THAN 300 FIRMS SURVEYED BY MCGRAW-HILL INCREASED BY 16.5%. LAST YEAR R&D SPENDING INCREASED BY 8.4%; THIS YEAR IT IS PROJECTED TO INCREASE BY 8.2%.
IT IS IMPORTANT TO LOOK AT THESE FIGURES IN LIGHT OF RECENT ECONOMIC EVENTS. FIRST OF ALL, THE BOOM IN R&D SPENDING THAT WAS GETTING UNDERWAY