When it comes to the advanced industries that drive the modern economy — industries like aerospace, biopharmaceuticals, computing, machinery, semiconductors, software, and the internet — America is no longer the undisputed leader. There is an intense race for global innovation advantage on all fronts, as not only China, but also many traditional U.S. allies have made surpassing us a centerpiece of their economic policies. At risk are good-paying jobs, U.S. competitiveness, and national security.
Among the key policy tools that America’s competitors have deployed to establish an edge in that competition are tax incentives for companies to invest in research and development. This is a case of the pupil outdoing the master, for the United States was the first country to establish an R&D tax credit in 1981. As recently as the mid-1990s, the United States maintained the most generous R&D tax incentive in the world. As scholarly studies have shown, that helped America stay ahead of its competitors by boosting R&D investment, innovation, jobs, and GDP growth.
Fast forward to today, and it’s a very different picture. Among the 30 OECD nations with more than 4 million people, plus the BRICs (Brazil, Russia, India and China), America’s R&D tax credit support ranks just 24th in its generosity. This is because other nations have realized the importance of R&D incentives and have either added them to their innovation policy tool box or expanded them. China’s R&D tax subsidy, for example, is 2.7 times more generous than America’s. Overall, the U.S. R&D tax subsidy rate is just 57 percent of the median rate of these other nations.
And it gets worse. Starting in 2022, because of provisions in the Tax Cuts and Job Creation Act of 2017, the United States will be on track to be one of the few countries that does not allow companies to expense current R&D costs. Letting this change go ahead would dramatically reduce the generosity of the credit. In fact, it would drop the United States to 32nd out of 34 nations.
It would be one thing if these other nations were adopting a policy tool that was ineffective. But research and experience shows that R&D tax incentives spur investment and economic growth.
Moreover, while states like California, Michigan and Massachusetts are home to firms that invest disproportionately in R&D, all states have firms that invest significant amounts in R&D. For example, in Idaho, business investment in R&D accounts for almost 3 percent of the economy. And all congressional districts have high-tech firms that employ scientists and engineers—precisely the kinds of firms that invest in R&D. Moreover, firms of all sizes, including start-ups, take the credit. It has become even more common since the passage of the 2015 PATH Act, which allowed eligible start-ups to apply some of their R&D tax credit to their payroll taxes.
All of this being the case, it comes as no surprise that President BidenJoe BidenPaul Ryan: Voters won’t be impressed by ‘yes-men and flatterers flocking to Mar-a-Lago’ Intelligence told White House they have unexamined evidence on coronavirus origins: report Milley says U.S. planning for potential evacuation of Afghan translators from region MORE’s American Jobs Plan would expand the R&D credit. There is also bipartisan, bicameral legislation: The American Innovation and Jobs Act, introduced by Sens. Maggie HassanMargaret (Maggie) HassanThe ‘frills’ of Biden’s infrastructure plan are real needs DC statehood bill picks up Senate holdout Overnight Health Care: Biden announces 1M have enrolled in special ObamaCare sign-up period | Rand Paul clashes with Fauci over coronavirus origins | Biden vows to get ‘more aggressive’ on lifestyle benefits of vaccines MORE (D-N.H.), Todd YoungTodd Christopher YoungSenate votes to advance China bill after Schumer strikes deal Drama scrambles Schumer’s China bill Schumer rolls the dice on major China bill MORE (R-Ind.), Catherine Cortez MastoCatherine Marie Cortez MastoOn The Money: Incomes, consumer spending soared in March | Harris, senators work behind scenes on jobs package | Biden cancels some border wall construction Hillicon Valley: DOJ to review cyber challenges | Gaetz, House Republicans want to end funding for postal service surveillance | TikTok gets new CEO Americans for Prosperity launches campaign targeting six Democrats to oppose ending filibuster MORE (D-Nev.), Rob PortmanRobert (Rob) Jones PortmanRon Johnson holds up Senate’s holiday weekend exit GOP snag complicates Schumer’s China bill — again Biden faces dilemma on Trump steel tariffs MORE (R-Ohio), and Ben SasseBen Sasse3 GOP senators come out against Biden intelligence nominee over Huawei ties Biden to meet with Putin next month This week: Senate set for chaotic sprint before break MORE (R-Neb.), along with the companion American Innovation and R&D Competitiveness Act, introduced in the House by Reps. John Larson John Barry LarsonTo encourage innovation, Congress should pass two bills protecting important R&D tax provision Democrats have a growing tax problem with SALT On The Money: Social Security gives IRS data for COVID-19 relief checks | Senate passes bill heading off Medicare cuts MORE (D-Conn.), Ron EstesRonald (Ron) Gene EstesTo encourage innovation, Congress should pass two bills protecting important R&D tax provision Lobbying world Commerce Bank joins companies halting support for officials who opposed Biden transition MORE (R-Kan.), Jimmy PanettaJames Varni PanettaHillicon Valley: Parler app risks charges of selling out with Apple return | Justices hear First Amendment clash over cheerleader’s Snapchat | Google pressed to conduct racial equity audit Lawmakers introduce legislation to create civilian reserve program to fight hackers To encourage innovation, Congress should pass two bills protecting important R&D tax provision MORE (D-Calif.), Darin LaHoodDarin McKay LaHoodTo encourage innovation, Congress should pass two bills protecting important R&D tax provision GOP leader to try to force Swalwell off panel Rahm Emanuel predicts Trump will seek retribution against GOP opponents, won’t run for reelection MORE (R-Ill.), Suzan DelBeneSuzan Kay DelBeneDemocrats renew push for permanent child credit expansion Democrats signal House bill to go further than Biden proposal on child tax credit Democratic scramble complicates Biden’s human infrastructure plan MORE (D-Wash.), and Jodey ArringtonJodey Cook ArringtonRepublicans attack Biden agenda after disappointing jobs report To encourage innovation, Congress should pass two bills protecting important R&D tax provision House passes bills providing citizenship path for Dreamers, farmworkers MORE (R-Texas), would make several critical improvements to the credit.
First, it would expand the refundable R&D credit so that more start-ups and young businesses can use the credit, something that is particularly important for young firms with limited cash flow. Second, it would restore incentives for R&D investment by ensuring that companies can continue to fully deduct R&D expenses in the year they are incurred. Members are also working on legislation to at least double the regular R&D credit from 20 percent to 40 percent and the Alternative Simplified Credit from 14 to 28 percent.
Expanding the R&D tax credit has broad support because it would boost innovation in all 50 states while spurring clean energy technologies, creating good jobs, and boosting U.S. competitiveness and national security. The Biden administration and Congress should seize the opportunity to get this done.
Robert D. Atkinson (@RobAtkinsonITIF) is president of the Information Technology and Innovation Foundation (ITIF), the leading think tank for science and technology policy.