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qualifying research-related expenditures, such as indirect, overhead, or administrative wage expenditures, and from nonresearch expenditures, such as costs of market research, quality control, or production; (6) whether the base period computation rules are appropriate and have a positive impact on increasing research and experimental expenditures; (7) whether both a credit and tax deduction should be available for the same research expenditures; (8) the impact of the provisions on federal revenues; (9) the impact of the provisions on industry spending and allocation of research expenditure budgets; (10) whether the restrictions and limitations on the availability of the use of the credit have been effective to accomplish Congressional intent; and (11) in the event the credit is continued, whether any statutory or administrative changes should be made.
[For immediate release, Monday, June 4, 1984)
Hon. CHARLES B. RANGEL (D., N.Y.), CHAIRMAN, SUBCOMMITTEE ON OVERSIGHT, Com
MITTEE ON WAYS AND MEANS, U.S. HOUSE OF REPRESENTATIVES, ANNOUNCES THE SCHEDULING OF HEARINGS ON THE RESEARCH AND EXPERIMENTATION Tax CREDIT
The Honorable Charles B. Rangel (D., N.Y.), Chairman of the Subcommittee on Oversight of the Committee on Ways and Means, announced today hearings have been scheduled to examine the twenty-five percent tax credit for certain incremental research and experimentation expenditures. The hearings have been scheduled for Tuesday, July 31, and Wednesday, August 1, 1984, beginning each day at 10 a.m. in the Committee's main hearing room, 1100 Longworth House Office Building, Washington, D. C. The Subcommittee's hearings are being conducted at the request of Committee Chairman Rostenkowski and as part of the Oversight Subcommittee's continuing review of current Internal Revenue Code provisions.
Section 221 of the Economic Recovery Tax Act of 1981 provides for a twenty-five percent tax credit for certain qualified research expenditures paid or incurred by a taxpayer in carrying on a trade or business. Qualified research expenditures generally consist of "in house" expenditures by the taxpayer for research wages and supplies used in reseach, plus certain amounts paid for research use of laboratory equipment, computers, or other personal property, and sixty-five percent of certain amounts paid for contract research and basic research grants to universities and scientific research organizations. The credit applies to expenditures made after June 30, 1981, and before 1986, and is applicable to incremental expenditures above a base period amount according to the average of certain previous year expenditures.
In announcing the hearings, Chairman Rangel stated, “While the research credit does not expire until the end of 1985, there is considerable interest in addressing the credit this year. The Subcommittee had hoped to begin its examination of this matter at an earlier time, but has delayed its oversight review until a study on the impact of the credit is completed by the General Accounting Office (GAO). The GAO study is scheduled to be submitted to the Subcommittee on July 20, 1984. I hope other witnesses will also address issues beyond whether the existing credit ought to be extended."
As announced in an earlier press release (press release #8, dated September 20, 1983), the Subcommittee will receive testimony on the following issues: (1) whether the tax credit provisions should be allowed to sunset, should be extended, or should be made permanent; (2) whether the credit operates to stimulate additional research expenditures, or simply rewards increased research expenditures which would have been made in the absence of a credit; (3) the types of research expenditures and industry activities that have generated use of the tax credit; (4) whether the categories of qualifying research expenditures should be broadened or narrowed; (5) whether taxpayers and the Internal Revenue Service have been able to accurately distinguish qualifying research expenditures from non-qualifying research-related expenditures, such as indirect, overhead, or administrative wage expenditures, and from nonresearch expenditures, such as costs of market research, quality control, or production; (6) whether the base period computation rules are appropriate and have a positive impact on increasing research and experimental expenditures; (7) whether both a credit and tax deduction should be available for the same research expenditures; (8) the impact of the provisions on federal revenues; (9) the impact of the provisions on industry spending and allocation of research expenditure budgets; (10) whether present law rules on the availability of the use of the credit have been effective to accomplish Congressional intent; and (11) in the event the credit is continued, whether any statutory or administrative changes should be made.
The Subcommittee plans to receive testimony from the Department of the Treasury, the Congressional Budget Office, the National Science Foundation, tax and economic experts, interested industry groups, and other invited and public witnesses. In addition, the General Accounting Office will present the results of its study (scheduled to be completed on July 20, 1984) which the Subcommittee requested earlier this year regarding the impact of the tax credit on research and experimentation activities under present law.
DETAILS FOR SUBMISSION OF REQUESTS TO BE HEARD Individuals and organizations interested in presenting oral testimony before the Subcommittee must submit their requests to be heard by telephone to Harriett Lawler [(202) 225-3627) no later than close of business, Friday, July 20, 1984, to be followed by a formal written request to John J. Salmon, Chief Counsel, Committee on Ways and Means, U.S. House of Representatives, 1102 Longworth House Office Building, Washington, D.C. 20515. Notification to those scheduled to appear will be made by telephone as soon as possible after the filing deadline.
It is urged that persons and organizations having a common position make every effort to designate one spokesperson to represent them in order for the Subcommittee to hear as many points of view as possible. Time for oral presentations will be strictly limited with the understanding that a more detailed statement may be included in the printed record of the hearings. This process will afford more time for members to question witnesses. In addition, witnesses may be grouped as panelists with strict time limitations for each panelist.
In order to assure the most productive use of the limited amount of time available to question hearing witnesses, witnesses scheduled to appear before the Subcommittee are required to submit 100 copies of their prepared statements to the full Committee office, room 1102 Longworth House Office Building, at least 24 hours in advance of their scheduled appearances. Failure to comply with this requirement may result in the witness being denied the opportunity to testify in person.
Requests to be heard must contain the following information:
(1) The name, full address, and capacity in which the witness will appear, as well as a telephone number where the witness or a designated representative may be reached;
(2) A list of any clients or persons, or any organization for whom the witness appears; and
(3) A topical outline or summary of comments and recommendations.
The above information should also be incorporated in the prepared statements to be presented in person as well as those filed for the printed record of the hearings.
WRITTEN STATEMENT IN LIEU OF PERSONAL APPEARANCE
Persons submitting a written statement in lieu of a personal appearance should submit at least six (6) copies of their statement by the close of usiness, Friday, August 17, 1984, to John J. Salmon, Chief Counsel, Committee on Ways and Means, U.S. House of Representatives, Washington, D.C. 20515. If those filing written statements for the record of the printed hearings wish to have their statements distributed to the press and the interested public, they may provide 75 additional copies for this purpose to the full Committee office before the hearings begin.
[For immediate release, Tuesday, July 3, 1984)
Hon. CHARLES B. RANGEL (D., N.Y.), CHAIRMAN, SUBCOMMITTEE ON OVERSIGHT, COM
MITTEE ON WAYS AND MEANS, U.S. HOUSE OF REPRESENTATIVES, ANNOUNCES A CHANGE IN THE SCHEDULE OF HEARINGS ON THE RESEARCH AND EXPERIMENTATION Tax CREDIT
The Honorable Charles B. Rangel (D., N.Y.), Chairman of the Subcommittee on Oversight of the Committee on Ways and Means, announced today changes in the hearings to examine the twenty-five percent tax credit for certain incremental research and experimentation expenditures previously scheduled for Tuesday, July 31, and Wednesday, August 1, 1984. The hearings will now be held on Thursday, August 2 and Friday, August 3, 1984. The hearings will be held in the Main Committee Hearing Room, 1100 Longworth House Office Building, Washington, D.C. beginning each day at 10:00 a.m.
Individuals who have requested to be heard will be notified, as soon as possible, of the date and time they have been scheduled to appear. All other details concerning the hearings remain unchanged.
Chairman RANGEL. It is obvious from the size of the crowd that we all know why we are here. So, let's begin the hearing.
The Subcommittee on Oversight has been assigned the responsibility by the chairman to begin examination of the 25-percent research and experimental tax credit. The credit was enacted in 1981 as a part of the Economic Recovery Tax Act.
The research credit provides a credit equal to 25 percent of the incremental amount of "qualified” research expenditures a firm makes over and above its average research spending for the 3 prior years.
A taxpayer's research expenditures eligible for the credit consist of:
One, "in-house" expenditures for wages and supplies used in research, plus certain lease payments.
Two, 65 percent of amounts paid for certain contract research.
Three, 65 percent of amounts paid for certain basic research performed by universities and scientific organizations.
The R&E credit is scheduled to expire at the end of 1985.
Because of the scheduled expiration of the credit and broad congressional and national interest in encouraging research in the United States, these hearings are designed to accomplish several objectives:
To determine the credit's impact, to date, on U.S. research activities.
To determine whether the credit (as it is presently structured) is effective in stimulating additional research activities.
In the event the credit is continued, what changes the Congress should consider to make it more effective.
We have tried to bring in as many people as possible to have the benefit of as many different views as possible. We hope that the witnesses will try to restrict their testimony to 5 minutes. Your complete statement will be entered into the record.
This record will remain open for that purpose until September 17 of this year.
The staff has requested that information be provided to us as to whether or not your firm or association members claimed the research tax credit. If so, for what year and what amount; the types of research activities for which the credit had been claimed; and the type of improvement and product to which the research relates.
What is important to members of the committee and the Congress is whether the credit is being taken for the types of activities that the Congress intended it to be used for and whether these activities would have occurred without the credit.
We are concerned with the cost of the credit. Some of us believe we are going to have to have a revenue-producing year next year unless, as the President predicts, we have a miraculous recovery that is going to wipe out the deficit.
Our first witness will be Senator DeConcini. His testimony will be followed by Government and administration witnesses, and perhaps other Members of the Senate.
Let me personally welcome you, Senator, for the expertise that you have consistently brought to the Senate and for sharing it with those of us on the other side.
STATEMENT OF HON. DENNIS DeCONCINI, A U.S. SENATOR FROM
THE STATE OF ARIZONA Senator DECONCINI. Thank you, Mr. Chairman.
Let me truly thank you on behalf of many constituents in Arizona who are concerned about this legislation. I would also like to compliment you and the full committee for doing the oversight early, in time to get a handle on the issue. I really believe that it is one of the most significant pieces of legislation that your committee will consider next year.
I am pleased to have an opportunity to testify on the subject of the tax credit for research and development activity. You may know, Mr. Chairman, that I am the author of a flat tax proposal in the Senate. While I am not a member of the Finance Committee, I have spent a good deal of time considering the implications of many aspects of our present tax structure.
Today I would like to share my thoughts with the subcommittee as you inquire into the performance of the R&D credit. At the outset, I want to assure you that I do consider my advocacy for overhaul of the tax structure to be entirely consistent with my support for preservation of valuable economic incentives like the R&D credit. Until we accomplish a complete overhaul of our outmoded and outdated tax system, I will continue to work toward proper incentives within it. My proposal introduced this year as S. 557, would apply a flat across-the-board tax rate of 19 percent to all income-personal and corporate no exemptions, deductions or credits. The choice of a 19-percent flat tax rate figure in my bill is no accident and is relevant to your inquiry here today.
Nineteen percent represents the figure likely to assure that this Nation's revenue requirements are fully funded. If you stop and look at the number of corporate taxpayers whose tax burden exceeds that figure-in some cases, more than double that figure-it is quickly evident that the tax burdens of our society are not evenly distributed.
Healthy, economically contributory, corporate taxpayers are valuable resources. But a business such as the electronics industry which pays twice as much into the Treasury as a "fair share" allocation would mandate is clearly helping to subsidize other less productive sections of the economy. I am not a tax economist, but it is clear to me that there is merit to providing tax consideration to blunt the impact of disproportionate taxation on taxpayers which are contributing to the economy. Until we can overhaul the system, incentives for productivity and efficiency are, it seems to me, not only fair and just, but absolutely necessary. The R&D credit is, in my view, one such incentive.
In Arizona, the electronic manufacturing industry has taken great advantage of this credit. Over 100,000 Arizonans are employed by this industry and it continues to grow in my home State and elsewhere. These companies manufacture computers, satellites, telecommunications equipment, semiconductors, and other elec
tronics gear, and are engaged in fiercely competitive worldwide markets. They often find themselves going head-to-head against foreign companies which are being helped with direct subsidies from their own governments.
The "engine" of the high tech industry is innovation-coming to market with a faster computer, a more powerful chip, a smaller radio telephone. The source of innovation is research. The R&D credit plays a crucial role in keeping U.S. electronics companies competitive-it helps to "fuel" their competitive engines by providing an incentive to increase the rate of investment in R&Ē. The greatest benefit of the credit is the possibility of expanding the number of speculative research efforts which an innovative company can undertake. Not all research is fruitful in the marketplace, but the more that is tried, the greater the likelihood that the next great success will emerge.
I have heard this message from my high tech constituents time and time again and I have seen it working in their plants in my State. Indeed, not only electronics, but steel, chemical, mining, textile, and pharmaceutical companies have had their research efforts sparked by the credit.
You will be hearing from all of these groups, along with others who have problems with the way credit has been set up and used.
I want to thank you for taking the time to listen to these witnesses. I know what your time is like, serving in a similar capacity on the Appropriations Committee, but it is so crucial and it is so important.
As a proposer of reform, I could cast stones, too. Frankly, however, I don't believe that any of the critics of the R&D credit have suggested anything that the business community itself hasn't proposed, as a way of tightening up on the credit. I urge you to listen closely to the statements of industry in this regard.
Mr. Chairman, we have a lot of problems with our tax system. But we are not going to solve them all in a hurry. Some taxpayers are strong, disproportionate contributors to our Nation's economic health. Other industries which are not now performing as well will eventually improve their productivity and their ability to contribute to the economic health of the Nation if they invest in research and implement innovations. Let's help keep the productive industries competitive and productive.
The prospects for our economy are dim indeed if we don't innovate; as long as the tax code retains its present inefficiencies and inequities-and until we put into place a flat tax proposal-mecha
a nisms like the R&D credit must be viewed as necessary, useful tools to keep U.S. industries flourishing.
Thank you for your time. I appreciate your letting me testify as your leadoff witness this morning because of the appropriations conference committee that began 15 minutes ago.
Chairman RANGEL. Thank you, Senator. We will keep in touch
I join with you in wanting to reform the tax system as long as it does not interfere with many of the incentives my constitutents need for equity and fairness. We all want to close up some of those loopholes that the other people have.