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R&D tax fight turns into a partisan brawl

In theory, Republicans and Democrats both want to make the R&D credit permanent. But they are at war over the House GOP's proposal for it.
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A band of rain showers move over the U.S. Capitol in Washington, DC on March 12, 2014.

On paper, it's something nearly everyone agrees about: We should make a tax break for R&D a permanent part of the tax code, instead of renewing it every few years as Congress has done since the early 1980s. 

Both parties and President Obama himself have included a permanent R&D credit in their vision of a broader tax overhaul — something that Stanford economist Nicholas Bloom calls "one of those policy no-brainers."

"The best way to encourage firms to spend money on research is guarantee them long-run funding support, rather than a merry-go-round of continuously changing policies," says Bloom, who has studied the impact of policy uncertainty on the R&D credit. "Right now Congress is providing a New York taxi driver R&D tax credit – wild acceleration, swerving and braking as the policy is turned on and off. "

But Democrats hate the way House Republicans want to make it happen. In something of a role reversal, Democrats have turned into fiscal hawks on the issue, arguing that it's irresponsible to pass a $156 billion tax break—one that would overwhelmingly benefit large corporations—without paying for it.

The White House "strongly opposes" the House GOP bill to make the R&D credit permanent because it does so "without offsetting the cost, adding to long-run deficits," the administration said in a statement. "If the President were presented with H.R. 4438, his senior advisers would recommend that he veto the bill."

Republicans, for all their rhetoric about the ballooning federal deficit, have brushed off concerns about the price tag. And big business groups have lined up in their corner. "The R&D credit is a proven jobs credit and has a significant impact on private R&D spending and the creation of research jobs," said Ronald Dickel, an Intel Corporation executive and chair of the R&D credit corporation.

The Chamber of Commerce, National Association of Manufacturers, and the country's largest biotech trade association have also come out in support of the House GOP bill, which is expected to come up for a vote Wednesday. 

The R&D credit is among more than 60 temporary tax breaks, known as "extenders," that expired in December when Congress failed to renew them. Senate Democrats have a $85 billion bill that would extend most of them for two years, vowing to tackle the permanent changes as part of a comprehensive tax overhaul. Their package isn't paid for either, but they say that passing the GOP's more expensive, permanent tweaks to the tax code is a different matter.

"[A]ny permanent R&D has to be done comprehensively, not piecemeal and unpaid for it. To do it this way is fiscally irresponsible, I think it's hypocritical and it's programmatically dangerous," Democratic Rep. Sandy Levin, ranking Democrat on the Ways and Means Committee, said on the House floor on Wednesday. Democrats argue that it's also unfair for Republicans to insist on a tax break that would overwhelmingly benefit big businesses before taking up tax reforms that would help ordinary American families.  

Until recently, GOP Ways and Means Chair Dave Camp had also been pushing for a sweeping overhaul, unveiling his comprehensive tax plan in late February. But just a few weeks later, he announced that he would be retiring from Congress after 2014. And his committee has instead moved forward with a handful of bills to make just a few business tax provisions permanent, most of which would benefit large corporations and multinationals. 

Robert Atkinson, president of the Information Technology & Innovation Foundation, says that it's not worth waiting for a comprehensive overhaul to happen to move forward with policy changes that already have bipartisan support. 

"There’s a tradition of holding up pro-growth, pro-innovation legislation in order to make these compromises—we’ve done it with immigration," says Atkinson. "There’s not going to be a corporate tax reform bill before 2017, and you're holding up this really important stimulus for the U.S. innovation economy."