Taxes

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.

The federal government should give states providing low levels of unemployment insurance (UI) benefits an incentive to raise the level of their UI benefits by adjusting the unemployment tax rate and taxable wage base.

Over the last several decades the labor market has become more dynamic while at the same time the safety net of unemployment insurance has become weaker. This has happened because many states have sought to cut unemployment benefits as a way to keep employee UI taxes low. The federal government should reduce this type of race to the bottom competition by raising the UI tax mandated in the Federal Unemployment Tax Act (FUTA) from 0.8 percent to 1.1 percent. Raising the UI tax base would raise many states’ minimum tax rates and help reduce the incentive to keep benefits and eligibility low.

Congress should exempt the first $2,500 of unemployment insurance benefits from federal income tax.

Displaced workers often can find new work only in jobs that, at least at the outset, pay lower wages. The federal government can help displaced workers — and encourage them to find new jobs — by providing wage insurance. Yet cash-strapped states with budget neutrality rules in their constitutions may not be able to provide the level of assistance that many workers need. Within the American Recovery and Reinvestment Act the federal government allowed the first $2,400 of unemployment insurance to be exempt from federal income tax. Yet the exemption was only for 2009. Congress should make the exemption permanent.

Congress should increase the Alternative Simplified R&D credit in order to boost private sector R&D investments.

The U.S. R&D credit is far less generous than that of most other countries. In 2012, the United States ranked just 27th out of 42 countries studied in terms of R&D tax incentive generosity, down from 23rd just five years ago. Brazil, China, and India all offer more generous R&D tax credits than the United States. There are two potential policy options Congress could take increase America’s R&D competitiveness. Congress should either increase the ASC from 14 percent to 20 percent or it should expand the ASC by enacting a three-tier credit. Firms would continue to receive a credit of 14 percent of the amount of qualified expenses greater than 50 percent and below or equal to 75 percent of the average qualified research expenses. For qualified expenses greater than 75 percent and below or equal to 100 percent firms would receive a credit of 20 percent and for qualified research exceeding 100 percent of the base the credit would increase to 40 percent.

To boost investments in new equipment and to increase productivity, Congress should allow firms to expense, for tax purposes, all the cost of machinery and equipment in the first year instead of having to depreciate the costs over a number of years.

An effective growth policy needs to be based in part on lower prices for equipment and machinery. One way to do this is to let firms expense all the cost of equipment in the first year instead of having to amortize the costs over a number of years. Allowing for the expensing of purchases of plant and equipment will reduce the after-tax price of investment, raising the level of domestic investment and the productivity of workers. While expensing allows a tax-paying entity to deduct the full cost of assets in the year of purchase, depreciation spreads these deductions over a federally-determined asset lifetime. This costs firms more because they have less capital in early years. Expensing will not only make the U.S. corporate tax code more globally competitive, it will spur higher productivity and wages.

To promote collaboration between firms and non-corporate entities, Congress needs to broaden the R&D credit for collaborative energy-related research to any area of collaborative research and expand the rate from 20 to 40 percent.

There are several reasons to treat collaborative research more generously. First, participation in research consortia has a positive impact on firms’ own R&D expenditures and research productivity. Second, most collaborative research is more basic and exploratory than research typically conducted by a single company. Moreover, the research results are often shared, often through scientific publications. As a result, firms are less able to capture the benefits of collaborative re search, leading them to under invest in such research relative to socially optimal levels. Other countries, including Canada, Denmark, Hungary, Japan, France, Norway, Spain and the United Kingdom, provide firms more generous tax incentives for collaborative R&D. The U.S. provides a 20 percent total credit for collaborative R&D but it only applies to energy research.

Congress should avoid penalizing workers whose income fluctuates because they lose their jobs by reinstating income averaging in the federal tax code.

Before the 1986 Tax Reform Act taxpayers could average their income over three years, enabling them to avoid lower taxes in years when their incomes were temporarily low. The current federal tax code lacks this provision, penalizing workers who lose their jobs. Taxpayers should be allowed to average their income over three years and be able to take a tax credit for prior taxes paid if their tax liabilities fall because their incomes drop.

Time for “Repatriation Easing”

November 9, 2010
| Blogs & Op-eds

Last month's report of 151,000 new jobs was good news. At that pace, we can get back to the low 2007 unemployment rate - in 20 years! How can we do better? Last week the Fed tried "quantitative easing" - a dismal-science phrase for buying up government securities and dumping $600 billion back into the economy. Here's an additional idea: repatriation. In this blog post, Rob Atkinson argues that the idea has proven itself in recent years and is needed more than ever. Companies are eventually going to invest that trillion dollars or so now parked overseas. Why not amend the tax laws to make sure some of that money gets invested and moved into the economy here?