Restoring America’s leadership in innovation-based competitiveness is one of our greatest challenges. President Obama called it “this generation’s Sputnik moment.” But to do so is going to require significant changes to the U.S. innovation system. One way of doing so is reforming how we incentivize the private sector to invest more in the building blocks of innovation, specifically collaborative R&D. Growing sectors of the economy increasingly rely on collaborative research (e.g. research performed between a business and a university, federal lab, or consortium). Businesses are increasingly turning to universities, federal labs, and other external sources for research. For instance, the number of top ranked innovative commercial products borne from in-house private sector R&D declined from 47 percent in 1975 to 13 percent in 2006 and nearly all of the remaining 87 percent of new, innovative U.S. technologies in 2006 were developed by collaborations between businesses and federal labs, federal agencies, universities, and other businesses.
In response, competing countries are increasingly offering additional tax incentives to spur collaborative R&D. For example, Hungary reduces a company’s taxable income by up to 400 percent of the amount invested in collaborating with a university or research institution. Japan and Italy offer flat tax credits for collaborating with a university of research institution of up to 14 percent and 40 percent respectively. And in France firms can receive a 60 percent flat credit on R&D investments at universities and federal labs.
Yet, the R&D tax credit – the principle way government entices the private sector to invest in more R&D – falls short of effectively incentivizing research collaborations. To make the United States more competitive, Congress should make the following changes to the R&D tax credit:
- Expand the definition of basic research. Congress should eliminate language in the tax code that restricts the definition of basic research to projects “not having a specific commercial objective.”
- Double the rate for energy research consortia. In order to spur the expansion of more energy research consortia, Congress should boost the flat energy research consortia tax credit from 20 percent to 40 percent.
- Create a Collaborative R&D Tax Credit. If Congress is serious about making the United States the premier destination for innovation, it should make all collaborations between a business and a university, federal lab, or any research consortia eligible for a 40 percent flat tax credit.