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The tax extenders legislation that Congress enacts every couple of years to extend dozens of tax breaks for businesses has been criticized from the right and the left as pork for special interests. Yet Congress is considering making some of these tax breaks permanent. The leading candidate–the research tax credit–is one of the most problematic of the bunch. The credit  subsidizes everything from the development of new soda machines to the invention of kitchen equipment that replaces staff in fast food restaurants.

Many business activities qualifying as “research” are ones that Americans would not want to subsidize. For example, the accounting giant Deloitte openly advertises its services to help the food industry receive the credit for “developing new packaging” or “redesigning existing packaging.” Deloitte tells potential clients, “Developing new product flavors, appearances, textures, health benefits, and extending shelf life are all potentially qualifying activities.”

A Long Island firm is more specific, explaining that the credit can help companies improve “kitchen science” and then lists several activities that presumably qualify for the credit: “PepsiCo researchers utilize ‘flavor fibers’, small chemical sensors, in the test kitchen.” Coca-Cola developed the “Freestyle” soda machine. Using newly developed kitchen equipment, “Chili’s will be able to cut out 40 hours of labor each week.”

The firm even boasts how these activities can allow restaurant chains to replace workers with machines to save costs.

“In addition, many states are considering raises to the minimum wage, including the wage of tipped workers. Meanwhile, fast food workers in cities like New York have staged protests and walk-outs regarding issues of compensation. The ability to reduce labor needs through machine innovation is therefore a major way restaurants can continue to maintain margins.” 

As explained in CTJ’s 2013 report on the research tax credit, one of the major problems is that the definition of qualifying research has never been sufficiently clarified through regulations. Efforts to resolve that at the end of the Clinton years were thwarted by the incoming Bush administration, and have not been revived by the Obama administration.

House Bill Would Expand and Make Permanent the Research Credit without Examining Its Effects

Of course, none of this means that the research credit always goes toward questionable activities. It simply means that lawmakers should look into the matter, particularly as they debate expanding and making it permanent.

Unfortunately, most members of Congress have endorsed legislation that would at least extend the wasteful tax break for two years. Earlier this year the Senate Finance Committee approved, with bipartisan support, a tax extenders bill euphemistically called the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act. It would extend for two years more than 50 tax breaks, including the research credit. CTJ described this bill as a legislative travesty because it would increase the budget deficit by $85 billion to provide unnecessary tax breaks for businesses.

But the approach taken by the House of Representatives makes the Senate bill look like a model of fiscal responsibility. The House this year approved several bills that would increase the budget deficit by hundreds of billions of dollars by making some of these business tax breaks permanent. The one that seems to have the most support would make the research credit permanent — and double its cost by increasing the rate at which activities qualifying as “research” are subsidized. This proposal would increase the budget deficit by $156 billion over the coming decade.

The Obama administration sensibly indicated that the President would likely veto the bill if it came to his desk because its costs are not offset.

But some members of the House insist that they will not approve any tax extenders bill unless it also makes the research credit permanent. The implicit threat seems to be that if the House’s demands are not met, Congress will go home without enacting a tax bill and no Democratic member or Republican member will get to extend any of their cherished tax breaks. To which we say, what’s so bad about that?