R&D credit: an investment in New England’s future

New England has been the cradle of many of our country’s greatest movements. In the 18th century it was the struggle for independence, the essence of New England being forged in the Boston Tea Party, Lexington and Concord and the Battle of Bunker Hill. In the 19th century it was the Industrial Revolution, with textile mills harnessing hydroelectricity to power innovations in manufacturing that helped our country grow. And in the 20th century it was the technology revolution, with New England businesses playing critical roles in the creation and growth of the Web-based culture we have today.

These breakthroughs have saved lives, helped our environment, and bettered our communities.

Congress recently took a step toward ensuring the federal government will continue to support these technological innovations as we move through the 21st century. As the nation’s oldest regional business organization, The New England Council has lobbied for years for a permanent and robust research and development tax credit. Despite allowing that credit to expire at the end of the 2007, and holding several previously unsuccessful votes earlier to revive the credit earlier this year, Congress recently delivered a two-year, seamless extension of the credit, essentially paving the way for these critical breakthroughs to continue.

The importance of a robust R&D credit to our region is not merely theoretical or a narrow, targeted tax provision. An Ernst & Young study released in April illustrates the importance of the R&D credit to the New England region, showing that in 2005 nearly 4,300 New England businesses reported a form of research and development activity, with over 2,400 of those in Massachusetts. Four New England states (Massachusetts, Connecticut, Rhode Island and New Hampshire) are above the national average in R&D activity as a share of their gross state product – all four states are in the top 10 nationally.

The study shows that businesses of all sizes take advantage of the credit – 29 percent of the firms claiming the R&D credit had $1 million or less in assets, 21 percent had $25 million or more, with the remaining 50 percent falling somewhere in-between.

In total, over 17,700 businesses claimed $6.6 billion in 2005. And scientific and technical services, as well as the information sector (linchpins of the New England economy), represent a significant percentage of those nearly 18,000 companies.

Further breakthroughs

The R&D tax credit probably isn’t at the forefront of conversation around most dinner tables in America. Millions of Americans are working harder and longer to afford high gas prices and other energy costs. Many are challenged to afford the cost of health care. Almost all Americans struggle to squeeze every ounce out of their paychecks. In difficult economic times, getting many Americans to care about the R&D tax credits may seem the height of minutiae.

What we all need to remember is that a commitment to research and development is an investment in the future of our country for our children and their children as well. New England researchers are finding ways to use fossil fuels in a cleaner manner, deliver them more efficiently, and developing the next generation of alternative and renewable sources of fuel. Cleaner-burning, hybrid and fuel-cell cars are being developed to benefit our environment, as well as stretch the monthly budgets of those combating high gas prices.

New England is proud to boast some of the greatest health-care and medical research facilities in the world. The procedural and medical breakthroughs they have developed have rendered “cutting-edge” medicine from just a few short decades ago obsolete, and will bring more efficient and more affordable health-care solutions to millions of Americans.

Most of the technology that has brought us closer together and made previously time-consuming tasks more convenient can be traced back to companies making a commitment to research and development. The R&D tax credit is an investment in the future of our nation and the quality of our day-to-day lives.

Reasonable arguments can be made that the federal government should work to discourage or altogether prevent U.S.-based companies from shipping jobs overseas, and that losing jobs is especially harmful to communities during times of weakness in our economy. The research and development tax credit encourages businesses to conduct research in the United States by limiting qualifying research to select research performed domestically, sustaining and creating American jobs and using the strengths of American entrepreneurialism to benefit our communities.

Finally, the research and development practices that qualify for the tax credit must involve a certain nature of the unknown. Experimentation by its nature is undertaken without a firm understanding of the result, which is very much the environment in which a great deal of research and development takes place.

For example, New England is home to global leaders in the fields of medical research and biotechnology. The breakthroughs they make bringing new pharmaceuticals and new medical procedures to the public do not happen overnight. They take years of expensive and painstaking research and trials with the very real possibility their efforts will be wasted if they can not achieve their desired result.

Extending the research and development tax credit gives companies a safety net that regardless of the end result, the federal government recognizes the importance of the research.

New England can and will lead the nation in technological and medical breakthroughs that will change the way generations of Americans live their lives. A seamless extension of the expired research and development tax credit is an investment in those breakthroughs. By successfully acting to extend the credit before adjourning for the year, Congress has made sure this critical research will continue.

James T. Brett is president and chief executive of The New England Council.