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ing for both capital goods and R&D is cut back, with firms tending to eliminate expenditures that aren't tied to current operations. During this recession, however, firms were making increases in R&D at the same time that they were cutting capital spending. This trend was expected to continue during 1983. The report also found that the ratio of R&D to capital outlays was projected to keep rising through 1986.
The report also noted the possibility that R&D spending could actually rise faster than envisioned by current plans. This is because plans for upcoming years were made during the depths of the recession and might well change as the recovery proceeds, and also because it would be consistent with patterns in recent history.
The R&D tax credit cannot take all of the credit for this new trend, of course. The jump in R&D spending was getting underway even before it was passed. But I am convinced that it constituted an important additional stimulus.
I can see the results in the high technology firms in my own district, companies like Wang, Digital, and Data General. These companies are reporting significant increases in R&D spending, increases far beyond the dollar amount of the credit. These increases can be seen both in absolute dollars and as an increasing percentage of sales, at a time when sales themselves are also growing.
I have received testimony from one of these companies, M/A COM, Inc., a leading firm in the communications area, which I understand will be part of the written record of these hearings. would urge the committee members to study this testimony carefully. It states specifically that the R&D credit has encouraged M/A COM and companies like it to undertake research and development efforts which they would not otherwise undertake. For this company, the credit during the 2 years it has been in existence "has become imbedded in the thinking" of the company's senior management and it "has had the effect of heightening the corporate priority for research."
I think that we should make sure that this trend continues. A short spurt of increased R&D spending, followed by another drop or plateau, is not going to keep the economy healthy in the long run. We need a permanent incentive. And the fact that a sunset was written into the R&D tax credit provisions does not mean that they were not supposed to be a permanent incentive. The purpose for the sunset was to give Congress a chance to see whether the credit actually worked and whether any of its provisions needed to be adjusted to make it work better. There may well be room to improve the credit by expanding the list of qualifying expenses, for example, and this is something we should look at a little further down the road. But for now, our first priority must be to recognize the fact that the credit is working and that we should make it permanent.
Why eliminate the sunset now? Why not wait until closer to 1985 when we can be more sure of exactly how the tax credit is working? For one very important reason: We must create a climate of certainty for the businesses that will be using the credit. Companies have already been grappling with a great deal of economic uncertainty as they try to plan their future expenditures. It is hard for them to plan their R&D expenditures when they can't even be
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
MAY 27, 1983
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.