US R&D tax credit debate – a different story entirely

As Science (subscription required) reported last week, the US Government’s US$700 billion bail-out of the financial sector included a bundle of provisions designed to get the legislation over the line, including an extension of the US research and development tax credit system.

The US R&D tax credit will cost US$8.3 billion next year
The US R&D tax credit will cost US$8.3 billion next year

There’s been much discussion lately about New Zealand’s 15 per cent R&D tax credit which came into force on April 1. The issue of using tax credits to stimulate investment in research and development has been politicized as National revealed it would scrap the credit to free up money for spending in other areas and in favour of direct funding of scientific institutions. Labour has slammed that proposal. Science minister Pete Hodgson said in a statement last week:

“One of New Zealand’s inconvenient truths is that private sector expenditure on R&D is almost exactly one-third of the western world average. Yes, New Zealanders are an innovative lot, but our companies are painfully bad at investing in R&D and commercialising R&D successes. The lack of a tax incentive until 1 April this year is one reason why.”

Here’s the current situation in the US, where an R&D tax credit has been in place for over 25 years. As Science notes:

“A perennial legislative priority for businesses, the research credit was first adopted in 1981 and has been extended a dozen times, often for a single year, and periodically revised. The original law provided a 20 per cent tax credit for additional research spending using a formula based on research as a share of overall sales from an earlier period. However, most companies now use a ‘simplified’ credit adopted in 2006 that rewards them for increasing their research budgets.

“Last week’s legislation raises the percentage on the simplified credit from 12 per cent to 14 per cent, it also makes it retroactive to the date the old provision expired, 31 December 2007, and extends it through 2009. Although businesses have lobbied hard for a permanent, 20 per cent credit, they are grateful for what Congress has done.”

The argument over R&D tax credit policy is on a different plain altogether. Both presidential candidates say the US R&D tax credit should be retained. But it will be expensive – US$8.3 billion next year. The cost also has to be offset by new revenue, which will be tricky to justify in the current economic climate.

But politicians everywhere point to greater levels of innovation and a continuation of investment to get us out of the mess the global markets are in. The question is what is the best way of achieving it for New Zealand and after the election who if anyone will get the credit?