WASHINGTON — With the research and development tax credit up for renewal, U.S. high-tech companies, manufacturers and pharmaceutical houses are making headway in their long-running effort to get Congress to enlarge the tax break.
The Senate has passed, and the House Ways and Means Committee has approved, an expansion of the credit backed by a coalition of companies led by Microsoft Corp., Boeing Co., United Technologies Corp., Electronic Data Systems Corp. and Guidant Corp. The group won a surprising victory this month when the expanded R&D credit was attached to a broader tax bill Congress expects to approve next month.
Still, it is unclear whether the expanded break will survive final negotiations between the House and Senate. The one-year cost for the expanded break, which would expire at the end of 2006, is estimated at $9.9 billion. It faces stiff competition for space within the five-year, $70 billion tax bill, and if tax writers deem the expanded credit too expensive, they will simply extend the current R&D credit, which costs $7 billion a year.
"To me, legislation is like sports: many times things will happen in the last two minutes that will completely change the game," says Monica McGuire, a lobbyist at the National Association of Manufacturers who helped coordinate the industry's lobbying coalition.
Supporters of the expanded tax break found that out the hard way last year. Although the bigger break was included in two tax bills — and once cleared the Senate without a single opposing vote — it was ultimately rejected as too expensive.
The credit was enacted as a temporary provision in President Reagan's first tax bill in 1981. Since then, it has been extended 11 times, typically for just a year or so, and was allowed to expire only once — for a year in the mid-1990s. In 2004, it was extended until the end of this year.
Industry lobbyists spent years pressing Capitol Hill's tax writers to make the tax credit permanent. But after repeated failures, lobbyists recently began seeking an expansion of the credit instead.
The credit offsets research and development costs for companies that need to invest time and money well in advance of rolling out new products. But fewer companies qualify for it nowadays because it is tied to a base period in the 1980s. If revenues increase faster than investments in research, companies qualify for little of the credit.
In trying to expand the break, companies ran into opposition from two powerful lawmakers: former Sen. Don Nickles (R., Okla.) and House Ways and Means Chairman Bill Thomas (R., Calif.). The industry caught a break last year when Mr. Nickles didn't run for re-election. Lobbyists went to work, seeking broad support for the expanded credit among Mr. Thomas's Republican colleagues on the Ways and Means Committee, including Rep. Dave Camp (R., Mich.), a senior member of the committee, and Rep. Eric Cantor, a three-term Republican from Virginia who also serves in the House Republican leadership.
In their arguments, lobbyists used a chart showing that most industrialized countries have far more generous tax breaks for investing in new technologies and manufacturing techniques than the U.S. "Finally, the light went on: This is a factor when companies decided whether to build in the U.S. or go abroad," says Ralph Hellman, a lobbyist for the Information Technology Industry Council, which represents the high-tech sector.
Sen. Orrin Hatch (R., Utah), a longtime supporter of the tax credit, says, "If we don't give some incentives for creativity, we could start to slip as the world leader in high tech."
By the time Rep. Nancy Johnson (R., Conn.) introduced the expanded credit a few days after April 15 this year, 19 of the 24 Republican members of the Ways and Means Committee were cosponsors. A 20th Republican has since signed on to the bill.
While Mr. Thomas didn't include the expanded credit in the $70 billion tax bill he introduced earlier this month, Ways and Means members voted to add it during a committee vote.
But that doesn't guarantee the provision will survive. Due to a quirky congressional rule, the tax bills are capped at $70 billion over five years. The centerpiece of the Senate bill is a $30 billion provision to prevent millions of middle-income taxpayers from being hit by the alternative minimum tax.
In the House, Mr. Thomas's bill excludes the alternative-minimum-tax patch in order to include a $20 billion measure to extend President Bush's 15% tax rates on capital gains and dividends from the end of 2008 through 2010. Republican leaders in both chambers would like to included both items in a final bill.
Also on the table are another $27 billion in unrelated tax breaks that do everything from encouraging low-income Americans to save for retirement to allowing taxpayers to deduct state and local taxes from their federal tax bills.
With a cap of $70 billion, tax writers will be pressured to narrow any provision in the bill, including the R&D credit.
"We are optimistic, but we are also very worried that it could get dropped in final negotiations," says Mr. Hellman, the high-tech lobbyist.
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Washington — The U.S. Senate approved a $60 billion tax-cut measure that spares about 14 million Americans from paying higher rates under the alternative minimum tax.
Lawmakers defied a demand by the White House to delete a $4.3 billion tax increase on oil companies in the measure, which passed on a vote of 64-33 shortly after midnight.
Senate Finance Committee Chairman Charles Grassley and the tax-writing panel's top Democrat, Montana Senator Max Baucus, refused to delete the tax on energy companies even after the White House warned it might veto the measure over the oil provision.
"This provision would result in a retroactive tax increase by changing a long-accepted accounting practice," the White House's Office of Management and Budget said in a statement released late yesterday. "The president's senior advisers would recommend that the president veto the bill if this provision remains in the final legislation."
The Senate measure, which extends expiring tax cuts and provides about $60 billion in tax savings over five years, must next be reconciled with a $57.6 billion tax-reducing measure the House of Representatives may consider today.
While the Senate assigns most of its tax reductions to preventing the alternative minimum tax from denying popular exemptions, deductions, and tax credits to families with incomes as low as $75,000, the House legislation emphasizes extending low rates on dividends and capital gains for two years beyond their scheduled Dec. 31, 2008 expiration.
Accounting Rule
The Senate proposal to impose a $4.3 billion tax on oil companies by denying a favorable accounting rule regarding inventories was overshadowing the larger tax-cutting measure.
Idaho Senator Michael Crapo said that provision "could bring the entire bill down" if it is part of a final version voted on later this year.
"The accounting rules we have for businesses around the country should be uniform and we shouldn't resort to gimmicks to try to punish a particular sector of our economy," Crapo, a Republican, said in an interview yesterday.
Senators added a provision in the closing hours of debate that would penalize companies such as Charlotte, North Carolina- based Wachovia Corp. that have claimed depreciation tax breaks on their leases of publicly-funded infrastructure such as sewer systems, rail lines, and air traffic control networks in foreign countries such as Germany and Canada.
The provision would deny future tax breaks from those leasing arrangements, no matter when they were signed, resulting in a $4.9 billion increase in federal tax revenues over the next five years.
Excise Tax
Earlier yesterday, the Senate rejected, 64-35, a proposal by Democratic Senators Byron Dorgan of North Dakota and Chris Dodd of Connecticut to impose a 50 percent excise tax on oil companies' profits when oil exceeds $40 a barrel, unless profit is reinvested in exploration activities or developing new refineries. An amendment by California Democrat Diane Feinstein and New Hampshire Republican John Sununu to eliminate some tax breaks for large energy companies also was defeated, 51-48.
"The major integrated oil companies have all the gain," Dorgan said, referring to large oil companies that have merged. "Who has all the pain? All the American people who are trying to pay for the price of a tankful of gas or trying to figure out how they are going to heat their home in the winter."
Net income for Exxon Mobil Corp. and the other top five publicly traded energy producers — BP Plc, Royal Dutch Shell Plc, Chevron Corp. and Total SA — rose 52 percent in the third quarter to a combined $33.4 billion.
Discourage Investment
Exxon Mobil Chairman Lee Raymond told senators last week that Congress should avoid "punitive" policies that interfere with oil-industry profit because they would discourage investments in exploration and refining.
The Senate made last-minute changes to the oil industry tax increase included in the legislation so that it would be more narrowly aimed at large energy companies that have merged in recent years without forcing smaller companies to pay higher rates. The last-minute changes trimmed the projected revenue flow from the levy to $4.3 billion over the next five years from earlier projections of nearly $5 billion.
The broader Senate tax measure must be reconciled with House legislation that includes a two-year extension of the 15 percent rate on dividend and capital gains. That low rate, enacted in 2003, is slated to expire at the end of 2008.
Differences
The House and Senate measures differ in other major ways. For example, the House legislation doesn't extend the provision that stops the alternative minimum tax from taking away exemptions, deductions, and credits from families with incomes as low at $75,000.
The alternative minimum tax, first passed in 1969, was originally designed to prevent the wealthy from avoiding most or all taxes by using exemptions, credits and other income deductions. The tax is not indexed to inflation, so Congress has had to adopt a series of stop-gap measures to blunt its impact on the middle class. The latest such patch is scheduled to expire this year.
Grassley described that provision as a centerpiece of his legislation.
The Senate also deleted limitations on a research credit used by companies such as Microsoft Corp. and Boeing Co. imposed this week in the Finance Committee. Those limits would deny tax breaks when the research was conducted in conjunction with a government contract.
That would bring the provision in line with a House measure expanding the tax break, currently worth about $5 billion annually to U.S. companies.
The Senate measure also includes tax cuts to help survivors of Hurricanes Katrina, Rita, and Wilma, which the House didn't include.
source: http://www.bloomberg.com/apps/news?pid=10000103&sid=aQJMYDNf9KLw&refer=us 28nov2005
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