In the debate over the "fiscal cliff," politicians and news celebrities tell us of the danger ahead—how jobs will be lost and how the economy will slow down. Most of the attention and dialogue is focused on personal income taxes and deductions.
Unfortunately, little attention is being paid to a change in our tax code that has already occurred. It's something that needs to be addressed before 2012 ends—if it isn't, it could have an adverse effect on future economic and job growth in the United States.
As I write, Congress has not extended Internal Revenue Code Section 41: the credit for increasing research activities, commonly known as the research and development (R&D) tax credit.
Originally enacted in 1981, Congress has never made the R&D tax credit permanent; it has continually extended it. The credit was last extended for two years on December 17, 2010, retroactive to December 31, 2009. So the credit has now expired (on 12/31/11). This time around, there is no way to judge whether it will be extended (retroactively or even at all), given the rhetoric in Washington. (Read More:
So how would the expiration of the R&D tax credit impact the U.S. economy and much needed job growth?
Investment in research and development is a significant driver of technical progress and economic growth. The goal of the R&D tax credit is to encourage R&D investment by both domestic and foreign corporations in the United States. The effect of not extending the R&D tax credit could have a disastrous impact if these firms go to other countries that actually have better tax advantages that encourage R&D spending.
A July 2012 report by the ITIF (The Information Technology & Innovation Foundation) concluded the U.S. has fallen behind other nations regarding R&D tax credits. Countries such as Brazil, Canada, China, France and India have implemented tax credit programs that are more generous than the U.S. Even countries with economic budget challenges have significantly expanded their R&D tax incentives.
The study determined that the U.S. now ranks 27th out of 42 countries in R&D tax benefits, down from 23rd just five years ago. If the R&D tax credit is not extended, the U.S. could lose out on the capital investment, economic growth and high-wage R&D jobs these investments bring. I cannot imagine the economic impact and the loss of technology leadership in the U.S. if the existing tax credit program expired. (Read More: Companies Shelling Out Billions to Beat the 'Fiscal Cliff.')
Unfortunately, it appears with the tax advantages overseas and the economic and political uncertainty here in the U.S., the trend by U.S. multinationals is to grow their R&D jobs overseas. Based on a November 2012 report by the Council on Foreign Relations, from 2004 to 2009, U.S. multinationals grew their international R&D employment from 137,800 to 267,400, while only creating 22,300 new domestic R&D jobs.
As Congress and the president speak about their desire for job growth, any decision not to extend the R&D tax credit could help continue this migration away from the U.S. (Read More: America's Top States for Job Creation.)
Some studies have concluded that R&D tax incentives create more spending. In a report titled "How effective are fiscal incentives for R&D?" authors Bronwyn Hall and John Van Reenen found that between 1981-1991 approximately $2 in research were generated for every $1 in tax expenditure. Conclusion: The loss of the R&D tax credit would not only harm job growth but also capital spending here in the U.S.
The conversation about the fiscal cliff should not just be about personal tax rates and we should not wait for one decision that could take months. A crucial part of the tax code is changing right now and we must understand the U.S. competes in a global market. The U.S. will have a serious issue if the R&D tax credit is not resolved quickly.
As a CEO of a small publicly-held technology company, we have already felt the impact of not extending the R&D tax credit. Because the credit cannot be considered a tax asset until it is extended or renewed, the R&D credit cannot be recognized. Therefore our earnings in 2012 are lower by about 2 to 3 percent compared to previous years. This, combined with ObamaCare, is driving our employee medical costs much higher in 2013; we will have no other choice but to consider reducing employee headcount in 2013.
Bart Shuldman is the Chairman and CEO of Transact Technologies, Inc. (NASDAQ: TACT)
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