Economists offer new arguments for U.S. research tax break

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Economists offer new arguments for U.S. research tax break

Add another study to the sagging bookshelf of reports suggesting that the United States would benefit from permanently allowing companies to get a tax break for investing in research and development.

The National Association of Manufacturers (NAM), one of the nation’s largest industrial trade groups, today released a report from three academic economists that reviews the scholarly literature on the economic impact of the so-called R&D tax credit, worth some $7 billion annually in recent years. It concludes that making the credit permanent—a long-sought goal of industry and science groups—could boost the U.S. gross domestic product (GDP) by 0.16% annually and add between 36,000 and 38,300 jobs each year.

The report marks the renewal of what has become a perennial lobbying campaign in Washington, D.C. For years, many economists and a large bipartisan group of lawmakers in Congress have advocated making the credit more generous and permanent, arguing it is an efficient way of promoting investment in scientific advances. Since the credit was created in 1981, however, Congress has allowed it to lapse six times—most recently in January 2014—and temporarily extended it 16 times. Last month, for example, Congress retroactively extended the credit for 2014.

The credit’s long-term cost is one big reason lawmakers have been so cautious. Analysts estimate making the break permanent would reduce tax revenues by some $100 billion to $150 billion over the next decade, and lawmakers have so far been unable to agree on ways to offset that loss of revenue.

It’s almost certain lawmakers will ultimately reinstate the credit for 2015. But NAM and other groups hope Congress will finally agree to make it permanent, perhaps as part of a larger overhaul of the U.S. tax code.

Today’s report, titled A Missed Opportunity: The Economic Cost of Delaying Pro-Growth Tax Reform, tries to strengthen the case for taking the plunge. It reviews scholarly studies of the R&D credit and four other business-related elements of tax policy and concludes that proposed reforms could, together, boost annual GDP by 1% and create 500,000 jobs per year. “These estimated impacts are significant and worthy of consideration in the ongoing discussion about the future of pro-growth tax reform,” write the authors, economists Donald Bruce and Matthew Murray of the University of Tennessee, Knoxville, and Tami Gurley-Calvez of the University of Kansas Medical Center in Kansas City. “Additionally, we do not believe they are out of line with the prior literature.”

Whether the new numbers will help change the political calculus in Congress, however, won’t be known until lawmakers begin discussing tax policy in earnest, sometime later this year.

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