While process R&D, done to improve the process of production in firms, is technically eligible under the definition of qualified R&D, in practice it can be difficult for companies to take the credit, in part because Treasury interprets the statute very narrowly. But there are spillovers from process R&D which means that without the credit firms will do less process R&D than is economically optimal for the nation.

Studies show that the research and development tax credit is an effective way of stimulating private-sector R&D. Moreover, state R&D tax credits appear to be even more effective than the federal credit. While 38 states in 2006 linked their R&D tax credits with the federal R&D tax credit, allowing firms to take a 20 percent credit on increased R&D funding, many states have not updated their tax code to link to the increased Alternative Simplified Credit, which rose from 12 to 14 percent.

The competitiveness of industry depends in part on the skills of its workers. Given the rapid increase in education levels abroad, it is clear that the skills of American workers must be strengthened both pre-market—through better high school curri cula and higher college matriculation and completion rates—and through on-the-job training. Training and on-going education are critical drivers of ro bust productivity growth and rising worker incomes. And a key way workers get skills is through training provided on the job by employers. But U.S. companies invest much less in training today than they did a decade ago. Therefore, to spur greater workforce training while at the same time lowering the effective corporate tax rate, Congress should allow expenditures on employee training to be added to qualified research expenditures under the R&D tax credit.

Allocating 0.15 percent of agency research budgets to commercialization programs would generate $110 million per year to fund technology commercialization and innovation efforts. Half the funds could go to universities and federal laboratories for a variety of initiatives, including mentoring programs for research entrepreneurs, student entrepreneurship clubs and entrepreneurship curricula, industry outreach programs, seed grants for researchers to develop commercialization programs, etc. The other half could go to match state technology-based economic development (TBED) programs. These programs, such as the Oklahoma Technology Commercialization Center, assist researchers, inventors, entrepreneurs, and companies in turning advanced technologies and high-tech startup companies into growing companies.