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House Republicans today are planning to pass a deficit-financed tax cut that mainly benefits already profitable big businesses under the premise that the tax cut will spur innovation. The bill, which has bipartisan support, would expand and make permanent the research credit at a cost of $182 billion over a decade. If anything, the research credit should be significantly reformed or allowed to expire, rather than being made a permanent part of the tax code.
Corporate lobbyists and their allies in Congress argue the research credit provides companies with an extra incentive to invest in research that could provide positive benefits for society as a whole. While wanting to promote research and innovation seems as wholesome as apple pie, the research credit more closely resembles a cow pie.
One of the biggest problems with the research credit is that it largely subsidizes activities that no one would consider research that is broadly beneficial to society. For example, companies can receive the credit for “developing new packaging” and new “soft drink flavors.” To fix this problem, Congress could limit the credit to actual scientific research, by implementing the common sense regulations put forward by the Clinton Treasury, but withdrawn by the George W. Bush Administration.
Adding to this, the research credit does a poor job of incentivizing additional research of any sort. The most egregious example of this is the fact that companies are now allowed to apply for the tax credit retroactively by filing amended tax returns. It’s highly implausible that a company would do more research in response to a tax credit it didn’t know it was eligible for. A simple fix to this would be for Congress to disallow companies to claim the credit on amended returns.
Rather than making these critical reforms to the research credit, the House legislation would make matters worse by doubling the cost of the credit by increasing the percentage rate at which “research” is subsidized.
The House legislation is unpaid for so the $182 billion loss in revenue over ten years would directly increase the deficit. In fact, with the passage of the research credit, House Republicans will have approved more than $300 billion in deficit busting tax breaks for corporations and wealthy individuals since the start of the year.
While House Republicans appear content to add $182 billion in tax breaks for corporations onto the deficit, they have at the same time refused to make permanent expansions to the earned income tax credit (EITC) and the child tax credit (CTC), which would cost around $155 billion over the next decade. These credits are critical in helping working families get ahead, and if they are allowed to expire at the end of 2017, more than 13 million families would lose an average of $1,073 a year.
While the research credit has bipartisan support, there is likely enough opposition from President Obama and many Democrats to stop full passage of the legislation. In fact, the White House has issued a formal veto threat against the bill. The real concern moving forward is that in the push to renew the now-expired research credit and other tax extenders, lawmakers will try and make many of these provisions permanent as part of a large corporate tax giveaway package later this year.