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May 14, 2014

Deficit-Financed Extension of Research Tax Credits Gets Nod from House

Several days of hotly contested debate over legislation that would make the Code Sec. 41 research tax credit permanent gave way to a bipartisan vote for House passage on May 9. House lawmakers approved the American Research and Competitiveness Bill of 2014 (HR 4438) over the objections of Democratic leaders, who faulted the bill because its 10-year cost of $155.5 billion will be added to the federal deficit. The legislation, introduced by House Ways and Means members Reps. Kevin Brady, R-Tex., and Ron Kind, D-Wis., passed by a vote of 274 to 131.

The research and development tax credit is one measure in a group of bills commonly known as the tax extenders, so-called because Congress routinely allows these provisions to expire and then renews them for several years at a time. Congress last extended the credit until December 2013 as part of the American Taxpayer Relief Act (P.L. 112-240). Ways and Means Chairman Dave Camp, R-Mich., said a permanent extension, even though it is not offset with other tax increases or spending cuts, would boost creation of high-paying manufacturing jobs.

Camp ignored complaints by Kind, House Minority Whip Steny Hoyer, D-Md., and several other Democratic leaders about the cost of the bill. He endured days of charges that GOP lawmakers were being hypocritical because they refused to pass other measures like extended federal unemployment benefits without a revenue offset, but would increase the deficit to help businesses.

Camp cited earlier votes by Democrats, including then Sen. Barack Obama, D-Ill., in previous legislative sessions to extend the credit without offsets. Despite his previous support while in Congress, President Obama, in a Statement of Administration Policy issued by the Office of Management and Budget on May 6, would prefer an extension of the research credit paid for by closing tax loopholes. The statement notes that four-fifths of the research credit is attributable to salaries of U.S. workers performing U.S.-based research—meaning that the credit helps create high-skilled jobs, as well as encouraging new innovations and future productivity.

Like the White House, lawmakers of both parties expressed support for extending the research credit. HR 4438 would provide a permanent, simplified method for calculating basic research and energy research expenses at a rate of 20 percent. It would change the base period for basic research from a fixed period to a three-year rolling average, according to a committee explanation of the bill.

Speaking at the 25th annual Baker and Hostetler Legislative Conference on May 7, Ways and Means member Rep. Pat Tiberi, R-Ohio, said that the House bill could easily be merged with a Senate counterpart in conference, following an expected vote in the Senate scheduled for the week beginning May 12. Tiberi said he believes Camp and Senate Finance Committee Chairman Ron Wyden, D-Ore., have the ability to pull it off.

The Senate version of the bill (Sen 2260), introduced by Wyden and ranking member Orrin G. Hatch, R-Utah, on April 1, is the Expiring Provisions Improvement, Reform and Efficiency (EXPIRE) Bill. The measure originally would have extended 44 of the 55 expired or expiring tax credits through the end 2015. Lawmakers said they expect that comprehensive tax reform will take place before that date. On April 3, the Finance Committee unanimously approved a modified version of the extender bill that added seven new provisions and four changes to earlier provisions, boosting the overall cost of the measure to $85 billion.

Although the Senate bill is more comprehensive, the Ways and Means panel has already begun work on five other extender tax bills. Committee ranking member Rep. Sander M. Levin, D-Mich., and his fellow Democrats mostly voted against the measures when they passed the panel on April 29. Levin said Republicans are being fiscally irresponsible to add $310 billion to the federal budget deficit by passing the bills without paying for them.

In addition to HR 4438, Ways and Means approved bills to make Code Sec. 179 expensing permanent, provide a permanent recognition period for built-in gains of S corporations and set permanent rules for basis adjustments for the stock of S corporations that make charitable contributions. The committee also approved bills to permanently extend the subpart F active financing exception and to set a permanent look-through rule for payments between controlled foreign corporations.

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