The R&D credit is on the list of “extenders” that Congress should take up in the lame duck session before they adjourn in December. Earlier this year, Michael Rashkin wrote in EE Times that “The R&D credit doesn’t work” and advocated for its elimination.  Let’s hope Congress ignores Rashkin’s advice. The R&D credit corrects a serious market failure and spurs U.S. companies to invest in more R&D, creating more jobs, more competitive firms and a stronger U.S. economy.

Innovation powers competitiveness and boosts living standards. Science and technology, in turn, are key enablers of innovation. This premise helped drive robust federal investment in science and technology in the 1960s, 70s, and 80s that fueled our post-war prosperity. It set the stage for the IT revolution, advances in life sciences, and the creation of millions of jobs and thousands of companies in the 1990s. But today we are shortchanging our future. The United States is now just eighth among OECD countries in R&D as a share of GDP. A key reason is that federal R&D investment grew in constant dollars at just 0.3 percent per year from 1987 to 2008. To restore federal support for research as a share of GDP to 1987 levels, we would have to increase federal funding by almost $110 billion per year. Unfortunately, we are moving in the opposite direction. Fiscal hawks want to put “everything on the table” when cutting the budget, even federal support for science. Many policymakers (usually, but not exclusively, Republicans) are wary of government funding for applied research and technology commercialization and prefer to confine public funding to basic science. While most Democrats are more willing to support R&D funding, too often they are willing to trade it off for increased social welfare spending. If we are to once again become a globally competitive innovation economy we will need to do what other nations are doing: boost public investment in research and put in place new efforts to spr commercialization of this research.

Reducing the budget deficit is important, but it should not and does not have to come at the expense of growth-inducing investments in areas like federal support for R&D. In fact, undermining growth capability is disruptive of a deficit control policy. Cutting federal support for R&D, a key "fuel" for the U.S. economic growth engine, would not only lead to a relatively smaller U.S. economy and higher unemployment, it would reduce U.S. global competitiveness precisely at a time when the U.S. economy is struggling to stay in the race for global innovation advantage.

R&D Tax Credits do increase innovative activity. With no policy currently in place, will the United States become even less competitive by failing to create an environment that properly induces firms to innovate? Policy makers must act by making increasing and making permanent the R&D tax credit, or we will all pay the price.

Because of the Budget Control Act, budget enforcement procedures known as sequestration will commence January, 2013 unless Congress and the Obama Administration act otherwise. The sequester requires cuts in discretionary spending to achieve $1.2 trillion in savings from 2013- 2021. When compared to 2011 spending levels, this will lead to a cut of 8.8 percent (or $12.5 billion) of federally-funded research and development (R&D) in 2013. Because of the key role federal R&D plays in driving U.S. innovation, productivity, and economic growth; we estimate that the projected decline in R&D will reduce GDP by between $203 billion and $860 billion over the nine year period, depending on the baseline used. At $203 billion, the loss is equivalent to taking away from U.S. consumers all the new motor vehicles purchase over six months, over two years of airline travel, or six years of attendance at professional sporting events.

These R&D cuts will also result in job losses of approximately 200,000 in 2013. Reducing the budget deficit is important, but it should not and does not have to come at the expense of growth-inducing investments in areas like federal support for R&D. In fact, undermining growth capability is disruptive of a deficit control policy.

The report first explains how sequestration will impact R&D expenditures and the U.S. innovation system. Next, the report presents the conceptual model and previous research explaining how R&D funding impacts the economy at large. Subsequently, based on the latest academic research, we estimate the effects of the R&D expenditure cuts on: productivity and GDP, the knowledge base (patents and publications), the U.S. standings in the global innovation system, and finally employment. While ensuring that the federal budget crisis comes under control is critical, everything should not be “on the table” when doing this. Cutting federal support R&D, a key “fuel” for the U.S. innovation economy engine, would not only lead to a relatively smaller U.S. economy and higher unemployment , it would reduce U.S. global competitiveness precisely at a time when the U.S. economy is struggling to stay in the race for global innovation advantage.