May 8, 2014 03:32 PM | Permalink |
Statement from Robert S. McIntyre, Director of Citizens for Tax Justice — Updated May 9
Research, innovation, inventiveness — these are the words we associate with cutting edge businesses and good paying jobs that won’t disappear any time soon. But when you involve members of Congress who want to use the tax code to encourage “research,” everything goes wrong.
The House of Representatives has approved H.R. 4438, a bill that would increase the federal budget deficit by $156 billion over the coming decade in order to expand and make permanent the research credit. The Senate should reject this measure. This tax break is supposed to encourage companies to conduct research, but instead ends up subsidizing activities that no American would want to fund and activities that companies would carry out on their own in the absence of any tax subsidy, as explained in a recent report from Citizens for Tax Justice.
The bill leaves in place the current definition of “research,” which is so broad that it includes redesigning packaging for food and writing internal accounting software used by no one outside the company that creates it. Given America’s challenges today, it’s hard to believe these are activities Americans want to subsidize.
In fact, the definition of “research” is so vague that Congress seems to be inviting companies to push the boundaries of the law and often cross it. The result is the type of trouble associated with accounting firms like Alliantgroup, which is managed by a former high-level staffer of Senator Chuck Grassley of Iowa and has former IRS commissioner Mark Everson serving as its vice chairman. Alliantgroup’s clients range from a hair care products maker who claimed its executives were doing “research,” to a software company who was advised to claim that its purchasing manager was doing “research.”
The pending bill exacerbates other problems with the research credit by allowing companies to claim it on amended returns. For example, accounting firms will inform a company that for a fee, they will help it file an amended return to claim the research credit retroactively for activities carried out years earlier that no one realized qualified as “research” at the time. When used in this way, the research credit is obviously subsidizing activities that businesses would (and did) carry out on their own, in the absence of a subsidy. That can’t do anything to increase research.
Curiously, Sen. Grassley is one of at least two senators who have called for expanding the ability of businesses to claim the research credit on amended returns as explained in the CTJ report. Despite a complete lack of any policy rationale for doing so, H.R. 4438 fulfills Grassley’s wish. During the markup of the bill in the Ways and Means Committee on April 29, the chief of staff of the non-partisan Joint Committee on Taxation testified that if it is enacted, there would be no bar on claiming the credit on amended returns.
Making permanent the research credit without reforming it first is bad tax policy for all these reasons. But even those lawmakers who disagree about the credit as a matter of economic policy should still oppose this bill in its current form because its large cost is not offset, but is simply added to the budget deficit.
It would be enormously hypocritical for Congress to enact deficit-financed corporate tax breaks like this one (and the other “tax extenders”) while claiming that emergency unemployment benefits cannot be extended unless lawmakers cut other federal spending to offset the costs. This is a clear-cut test of whether Congress responds to the needs of ordinary people or the dictates of corporate lobbyists.