Innovation Is Not an "Extender"

The end-of-year legislative rush is on, with Congress juggling Keystone XL, funding the government, internet access taxes, authorizing defense activities, terrorism risk insurance, and tax extenders - the roughly 50 tax provisions that expire and are extended annually for one year at a time. Among the extenders is the Research and Experimentation (R&E) tax credit, which dates to 1981. It provides a tax credit equal to 20 percent of qualified research expenditures that exceed a calculated base amount (there's an alternative calculation at a 14 percent rate).

The R&E credit (and a handful of others like enhanced depreciation), however, is different from the remainder of extenders. The R&E credit is not a victory for lobbyists. Its existence rests on the realization that everyone benefits from the production of new knowledge in the form of ideas, materials, processes, and technologies. When an individual firm undertakes the profit-loss calculation that determines its research budget, it focuses narrowly in its benefits and chooses its level of research. From the perspective of the nation, however, the benefits extend more broadly, running the risk that the firm undertakes too little research because it is focused only on its narrower benefit.

For this reason it is sensible to have an R&E credit, and it is very sensible for it to be a permanent part of the tax code - as our global competitors do. After all, a permanent incentive to innovate is much more powerful than a one-year inducement. However, the same argument does not apply to all of the tax extenders. There is no reason, for example, to permanently extend the production tax credit for wind energy. If wind energy is to have a permanent place in the energy portfolio, it needs to be able to compete on a level economic playing field -- without a tax subsidy.

Good tax policy should aim for more than a Groundhog Day-like endless cycle of extensions, expirations, repeat. It should support growth with sound economic policies that are permanent and predictable. Fortunately, the House of Representatives recognized the merits of this argument and included the R&E credit among the provisions that it made permanent earlier this year. That puts the onus squarely on the (still) Democratic-controlled Senate.

The Senate has preferred the (traditional) approach of one- or two-year extensions for the entire menu of expiring tax provisions. This permits the Senate to cynically court the favor of those who benefit from the extenders, while simultaneously claiming it cannot "afford" to permanently extend the entirely panoply's $1 trillion price tag.

Hiding behind the price tag is budget gimmickry at best. If those tax provisions were spending programs, most would be automatically extended without the need to "pay for" them. Their budgetary treatment is a direct descendent of the pro-spending, big government Democrat drafters of the 1974 Budget Act. And commonsense says that making the R&E credit permanent has the same budget impact as doing it every year.

But there is a deeper objection. Many of the extenders should not be permanent. Some should simply go away. But the pro-growth, pro-innovation incentives are different and important. Good policy is deeper than the budget numbers. In the end, the desire to make one tax provision permanent is a statement about the correct structure of the tax code. Making the R&E credit permanent is as step toward the tax reform that is badly needed.

The demanding end-of-year legislative push should not be an excuse to miss an opportunity to improve innovation and growth in the U.S. A one-size-fits-all approach to the extenders should be a relic of the past.