Taxes

Time for Washington to Think Like a State

February 14, 2011
| Blogs & Op-eds

For too long the conventional wisdom in Washington has held that the United States is not in competition with other nations. The neoclassical economists that dominate the debate argue that corporate tax policy reform should simply “level the playing field” and then suddenly the U.S. will thrive in the global economy. Yet the approach to tax policy would actually make our competitiveness worse. The states understand this; Washington does not. The economic policies of states are based upon the fact that a competitive corporate tax rate, particularly on “traded firms” is essential. Maybe it is time to send the DC economists for one-year stints in state government to see how the real world works.

17 is Not Enough: The Case for a More Robust R&D Tax Credit

February 8, 2011
| Reports

President Obama’s call to increase the R&D tax credit from 14 to 17 percent is an important first step in restoring America’s global innovation-based competitiveness. But if our nation is to really address the challenge—the “Sputnik moment” in the President’s words—17 percent is not enough. Increasing the Alternative Simplified Credit (ASC) from 14 to 17 percent will move the United States from 17th place amongst OECD nations to 13th—an improvement to be sure—but one that will leave the United States far behind the global frontrunners in terms of R&D tax incentives. We urge Congress to take up the President’s call to expand the credit, but expand it to at least 20 percent, as some in Congress have proposed.

Rob Atkinson on C-SPAN's "Washington Journal"

December 2, 2010
| Presentations

ITIF President Rob Atkinson discusses the research and development tax credit, innovation policy and U.S. global competitiveness during a segment of C-SPAN's Washington Journal. Tune in beginning at 9:15 a.m. on C-SPAN.

President Obama’s Accelerated Depreciation Proposal Will Boost Economic Growth

November 19, 2010
| Blogs & Op-eds

President Obama recently proposed letting companies (big and small) expense 100 percent of the cost of their equipment purchases made late this year and in 2011. It’s a good idea. It would be an even better idea if the expensing were permanent. Given the slow growth of capital equipment investment by U.S. companies, particularly manufacturers, in the last decade, the non-competitiveness of the U.S. corporate tax code, and the dramatic decline in U.S. manufacturing output and jobs (and corresponding chronic and enormous trade deficits), you’d think that both sides of the aisle would jump on this...

Congress should institute a 25 percent tax credit for company expenditures related to bringing a WTO case.

Government alone cannot fully investigate all potential WTO cases. The U.S. private sector is deeply engaged in the problems caused by unfair trade practices, while the government is a step away. Companies do not do more because they have an incentive to be “free riders”—taking advantage of cases filed by the government or prepared by other companies. Companies that do help bring cases are acting on behalf of the U.S. government. So what’s good for GM is, in this case, good for the country.

Congress should make clear that process R&D qualifies for the R&D tax credit. This will encourage more firms to invest in improving productivity, and will also make the U.S. a more attractive place to expand manufacturing operations.

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.

To increase industry R&D state governments should align state R&D tax credits with the Federal Alternative Simplified R&D tax credit.

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.

Congress would spur greater workforce training if expenditures on employee training were added to qualified research expenditures under the R&D tax credit.

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.

To grow manufacturing jobs states should extend sales tax parity for purchases to computers and IT equipment used in the production process.

A wide array of economic studies points to the importance of IT in driving productivity. Yet, most states are still stuck in the old economy when it comes to their tax incentives for manufacturers. Most provide a sales tax exemption for manufacturers for equipment purchased in the manufacturing process, and some even provide tax credits for the purchase of manufacturing equipment. But few extend this exemption (or credit) to computer and other IT equipment used in the rest of the plant, even though from a competitiveness standpoint it can have an even bigger impact than a traditional piece of machinery. For example, under Washington state’s rules governing its manufacturing sales tax exemption , manufacturing computers qualify only if they “direct or control machinery or equipment that acts upon or interacts with tangible personal property” or “if they act upon or interact with an item of tangible personal property.” Many other states have similar restrictions. States should simply eliminate this requirement and allow any IT equipment, software or devices purchased by manufacturers to be exempt from state sales taxes.