As first reported in the New York Times, President Obama is expected to ask Congress to increase from 14 to 17 percent the Alternative Simplified Credit percentage. Additionally a White House official said Sunday, that President Obama is expected to ask Congress to permanently extend research and development tax credits for businesses in an effort to spur economic growth ahead of November elections (please note that the proposal has not been formally announced).
The announcement is expected to be the first in a series of new measures Obama will propose this Fall as the administration looks to jump-start an economy that the President himself has said isn’t growing fast enough.
As you are likely aware, the R&D tax credit has never been a permanent provision of the federal tax code. Since its enactment in mid-1981, the credit has been extended 13 times and significantly modified five times. The tax credit expired last tax year (2009) and has yet to be renewed for 2010, however, the outlook appears good for this renewal as a proposal for renewal is pending in the Senate and the Congress has historically supported the credit.
The difficulty with renewal however may lie within the Senate proposal and how the President intends to pay for a permanent extension. President Obama is expected to ask Congress to close corporate tax breaks for multinational corporations and oil and gas companies. This could pose a potential sticking point as reported in August by the Wall Street Journal, in which these “pay-fors” are also intended to partially fund state education and Medicaid programs. This tax-cut extension package stalled in the Senate previously this year due to a Republican filibuster. Republicans had opposed the earlier package in part because it included the tax increases on multinationals, which they said hurt the ability of U.S. firms to compete overseas.
Business support for the “tax tradeoff” is split. Last month 22 U.S. companies said publicly they could support the foreign-tax-credit limits—but only if they are used to pay for an extension of the R&D and other tax credits. That concession was offered in a letter to Senate leaders from Citigroup, Dow Chemical, and Northrup Grumman Corp. and 19 other firms. However, manufacturers tend to be less supportive, “We are already at a competitive disadvantage with our worldwide system of taxation…These changes are making us less competitive and we’re opposed to using them to pay for unrelated spending initiatives,” said Dorothy Coleman, Vice-President at the National Association for Manufacturers.
With an immediate need to focus on job creation and stimulating the US economy the R&D tax credit seems an easy sale. This should make the R&D tax credit something that Congress can extend. However, with the current deficit issues and concerns, it’s difficult to believe that the tax credit will be made permanent or be increased. My guess is Congress will likely maintain status quo on the ASC percentage and extend the tax credit temporarily through 2011. What will Congress do? Who really knows, but at least they appear to be headed for a decision.