Congressman Kevin Brady Advocates for Enhancing R&D Tax Credit to Boost Economy
As the country starts to re-open, Congress has been debating how best to save American businesses and bring jobs back to America. In a recent Politico article, Congressman Kevin Brady, the architect of the Tax Cuts and Jobs Act, stated his belief to reporters that the R&D Tax Credit should be doubled to help boost the U.S. economy.
Brady is not alone in Congress in believing that enhancing the R&D Credit could be a vital step in spurring the economy and staving off unemployment. In fact, The FORWARD Act is a bi-partisan, bi-cameral bill that would offer several upgrades to the already powerful R&D credit. Below we take a look at how the credit has helped in past recessions and why it is popular among both parties.
The R&D Credit — A Tool for Saving Jobs
Perhaps the most salient economic response to a recession in recent times was the response during the recessions of the ’80s. Caused by unchecked inflation, the energy crisis of 1979 and the rise of foreign competition in the auto industry, the recession in 1981 resulted in widespread layoffs and high unemployment rates.
The auto industry had been hit particularly hard. Unemployment for the industry hit a high of 24 percent compared to the overall peak unemployment rate of 10.8 percent for the rest of the country.
Congress responded with the Economic Recovery Tax Act of 1981, which was designed as an across the board tax cut to increase liquidity and bolster the economy. To specifically address the automotive industry, Congress included a tax relief provision, the Credit for Increasing Research Activities that not only increased liquidity but also encouraged hiring domestically.
By the end of 1983, employment in the auto industry rebounded dramatically to surpass the peak employment numbers prior to the start of the 1981–82 recession. The sector would add more than a quarter of a million jobs between the end of the recession in 1982 and 1996.
The Congressional Budget Office (CBO) projects that unemployment for 2020 may settle at 11.4 percent. If the R&D credit was successful in helping reduce unemployment and spurring job growth in the auto industry when it was introduced, then surely lawmakers need to consider making it even more powerful as businesses struggle to keep their employees and millions lose their jobs.
Continued Use of the Credit in Times of Crisis
We’ve seen congress reprogram the credit over the years to respond to different recessions. At the time that the credit was first introduced in 1981, the requirements to claim it were fairly stringent resulting in larger, more sophisticated companies claiming the relief. But Congress recognized the value of the credit to American jobs could extend beyond just the auto industry and through the years continually renewed and tweaked the provision to maximize its economic impact and expand the benefit it provides to more industries and businesses.
For instance, by the time the dot-com bubble burst in 2001, causing a recession in the early 2000s, Congress already had the Research & Development Tax Credit (R&D credit) as an economic recovery tool. Congress decided to broaden the credit to as many businesses and industries as possible.
So, in 2003 when unemployment had reached its highest level of the recession, congress removed the biggest barriers to claiming the credit including removing the “Discovery Rule” which required that to qualify for the credit the taxpayer would have to introduce innovations that were new to the world. Now, taxpaying companies need only introduce activities that are new to the taxpayer.
The R&D credit is now applicable to a wide range of industries from the software and tech to agriculture. To qualify, a company needs to be able to show development or design of a new product or process or the enhancement of an existing product or process. If that sounds broad, that’s because it was designed to be.
If a software company creates a new program, if a manufacturing company increases their efficiency by introducing new machinery, or if a farmer experiments with a new type of feed with his livestock to increase yield, they could all claim the benefit of the R&D credit. It is of course not limited to these industries, any company that engages in qualifying activities can claim the credit.
On average, the credit is worth five times the average amount of the Paycheck Protection Program (PPP). The credit is wage based, so depending on the number of employees working on qualifying projects, the resulting value can be substantial. And, unlike government relief packages created in the wake of the pandemic, these are not loans that businesses would have to pay back.
How Further Expansion Can Help
The United States is not the only country with an R&D credit and we’re already seeing other countries use their credit as a form of economic relief due to Covid-19. Ireland for example is expediting the payment of R&D credits as refunds as a means of increasing liquidity for the struggling businesses of that country.
As it stands, the U.S. version of the credit is one of the lowest percentage values in the world. By comparison, the value of Canada’s credit for their companies is significantly more than the United States’ credit. Brady’s proposal of doubling our credit would bring us in line with our neighbors to the north.
The FORWARD Act includes several additions that would significantly increase the power of the credit including increased value for manufacturing companies, making training costs eligible for the credit and removing amortization rules.
Companies need to be utilizing this credit now to increase their liquidity. The credit was spawned from a recession, strengthened in a recession and now more than ever, should be utilized as it was intended as an economic recovery tool for businesses. Now we need to strengthen it more to save more businesses and jobs.
