By William T. Archey

July 12, 2006

Every two years or so, a game is played in Washington between the business community and politicians. The political football in this game is the research and development (R&D) tax credit.

Congress plays this game by passing the tax credit for only a limited time period -- sometimes a year, sometimes two years. Sometimes, the credit even lapses -- as it has now -- before Congress gets around to renewing it. Some have suggested that one reason why the R&D tax credit has not been permanently extended is because it provides an opportunity for some members of Congress to raise campaign funds.

Others say the R&D tax credit is not permanent because doing so is expensive in terms of the decline in government revenue. However, this neglects that the tax credit also engenders increased tax revenue because of the fruits of these R&D investments.

The problem with playing such a game with public policy is that the consequences are not a game. The purpose of the R&D tax credit is to provide companies with tangible incentives to invest in future innovation in the United States. R&D yields tremendous benefits that extend far beyond the company performing the research. R&D enhances the nation's knowledge base and technical capabilities. It spawns future innovations that no one, including the company, could have foreseen. Without it we would not have earned our place as the world's economic, military and technological leader.

We learned this lesson the hard way. When the Russians launched Sputnik in 1957, we still beat them to the moon not because our rockets were bigger or more powerful, but because our technology was superior. We poured money into R&D to make this happen, much of it through public investment.

Since that time, the private sector has proved to be critical in sustaining our research capabilities. From 1957 to 2004, companies spent $3.7 trillion of the $7 trillion spent on R&D in the United States.

But if we expect these levels of investment to continue on our shores, we need to strengthen the R&D tax credit and make it permanent. Enough is enough; the United States is not the only game in town.

The Russians are not coming this time, but the Irish, Canadians and Chinese are -- to name a few. While the United States fails to encourage R&D onshore, these countries are actively courting it with tax breaks and incentives. Ireland offers an R&D tax credit with a low corporate income tax. A total of 7,300 Irish jobs are now engaged directly in R&D. Canada offers a permanent R&D tax credit that attracts $2.5 billion annually from U.S. subsidiaries looking for attractive locations to operate.

Even developing nations are seeing that R&D leads to future innovation, economic growth and jobs. China is taking a page from the U.S. playbook by structuring its tax system to attract high-knowledge industries. China offers businesses a tax deduction of 150 percent for R&D expenditures.

U.S. companies have a long and successful track record performing R&D. The tax credit is one important incentive to support these breakthroughs, creating new products, services and entirely new industries.

While the R&D tax credit is not the only factor for companies when funding R&D, it is an important incentive, particularly as to where the R&D is performed. This incentive has a bottom-line impact for many companies, and countries around the world are using this to attract R&D to their shores. R&D that could be performed in the United States.

The U.S. R&D tax credit expired Dec. 31. When combining this expiration with the constant temporary renewals, companies located in the United States are limited in their ability to plan for R&D projects, both in the long term and short term. Their budgets cannot properly account for the tax benefit, and as a result, some R&D projects do not get the funding they deserve, or they are moved overseas.

While Washington is busy playing games with the R&D tax credit and allowing it to expire, countries around the world are exploiting our negligence to make their countries a more attractive location for R&D.

If Congress does not renew and strengthen the tax credit and add some predictability into the system, the United States is in danger of its R&D activities relocating abroad. And, when that happens, innovation, wealth and jobs will follow.

WILLIAM T. ARCHEY president and CEO of the AeA, the nation's largest industry association representing the electronics and information technology industry. He wrote this article for the Mercury News.