Original Post
August 3, 2011
(Bloomberg) -- It isn't the best time to be looking for a tax break from Congress as lawmakers focus their fiscal attention on reducing the U.S. budget deficit.
That hasn't stopped a bipartisan group of seven House lawmakers, including three who are members of the tax-writing Ways and Means committee, from backing legislation that would give new tax benefits to biotechnology, pharmaceutical and medical-device companies.
"Even in times of fiscal constraints, it is extremely important for us to create the environment for job creation," Representative Allyson Schwartz, a Pennsylvania Democrat and a sponsor of the measure, said about the timing of the bill. "This is very focused on what is a growth industry that does need incentives," she told Bloomberg Government in a phone interview.
The legislation would offer businesses in the area of "life sciences" a choice of two tax breaks: one is a credit of 40 percent for the first $150 million of research. That is double the current 20 percent research and development tax credit.
The other would be the opportunity to bring home to the U.S. up to $150 million annually in overseas profits at a low tax rate of 5.25 percent, with the requirement that the money be used to hire scientists or invest in research.
Repatriating Profits
Companies are subject now to a top marginal rate of 35 percent when repatriating overseas profits.
Both options could be renewed annually for five years.
Schwartz said the tax breaks are necessary because life sciences companies face increasing foreign competition and a weak U.S. economy that has imperiled the survival of young companies.
"I've talked to a number of start-ups who say they've struggled to maintain their solvency," said Schwartz, whose Philadelphia-area district is home to a division of New Brunswick, New Jersey-based health-care giant Johnson & Johnson.
The tax credit is targeted to smaller firms while the repatriation provision is expected to attract companies large enough to have overseas operations. Companies could switch between repatriation and tax credits in different years.
An analysis of the legislation prepared for a coalition of businesses and research institutes backing the plan estimates the bill would cost the U.S. Treasury $2.5 billion in forgone revenue over five years and $7.3 billion over 10 years.
The same report estimated that the legislation has the potential to create 580,000 jobs.
Job Creation
The tax holiday component is a relatively inexpensive way to promote job growth because it focuses on overseas profits that wouldn't be repatriated to the U.S. without a lower tax rate, said Brian Munroe, vice president for government relations for Chadds Ford, Pennsylvania-based Endo Pharmaceuticals Holdings Inc.
"Nobody believes that money's coming back" unless the tax rate drops, Munroe said.
A 2004 tax holiday has been criticized because much of the repatriated money was spent on dividend buybacks and other non- employment items.
Munroe said the bill contains provisions aimed at ensuring that funds brought back to the U.S. at low tax rates would be used for research and not diverted for other uses.
Research Spending
Under the House bill, and a companion Senate version introduced by Pennsylvania Democrat Robert Casey, repatriated funds must be kept separate from other company accounts and the company must certify that its research spending has increased from previous years.
While sponsors say the bill targets small and midsized companies, members of the business coalition supporting it include large multinational companies that also are eligible for the tax break.
The legislation was sharply criticized as a wasteful subsidy to business by Steve Wamhoff, legislative director of Citizens for Tax Justice, a Washington tax policy research group that advocates curbing corporate tax breaks.
Wamhoff said the tax subsidies would pay for research that would be done in any case, even without the tax break.
'Money Is Fungible'
"You can't tell a corporation what to do," Wamhoff said in a phone interview. "Money is fungible."
The life sciences proposal has political heft behind it in Congress. The main sponsor, Devin Nunes, a California Republican, along with co-sponsors Pennsylvania Republican Jim Gerlach and New Jersey Democrat Bill Pascrell Jr., are members of the tax-writing Ways and Means Committee, to which the measure has been referred.
The bill is being considered amid signs that after a long slump, venture capital is beginning to flow back into biotechnology firms.
Munroe said the intensity of competition from Singapore, China, India and other growing economies justifies using tax policy to reinforce private sector efforts to expand biotechnology and related industries.