Research and development is like motherhood and apple pie these days.
Even the Treasury Department, which wants to do away with practically every other business tax break, favors renewal of a special tax credit for R&D spending when it expires at the end of this year. So do members of Congress from both parties.
So why is the R&D lobby one of the most organized in town? Why has it hired two former congressmen and two former Carter administration officials to lobby Congress for the credit's extension? Why has it commissioned studies, written fact sheets, met with every member of the House and Senate tax-writing committees, and made its case before Treasury and White House officials?
Answer: The high-tech industry isn't taking any chances.
Under current law, companies can receive tax credits of 25 percent of the increase in R&D spending compared with the average of their spending over the previous three years. They want to be sure that when the credit expires on Dec. 31, there is an improved version enacted and waiting to take its place.
But the tax credit has some negatives, and it will not be renewed without debate. Because a credit reduces taxes owed dollar for dollar, it cuts federal tax revenue to the tune of $1.5 billion a year. House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.), concerned about the cost and the effectiveness of the credit, has not decided whether to support its renewal.
There is evidence that some companies have used the credit for purposes of questionable research value, although a spokesman for McDonald's Corp. firmly denies the widespread rumor that the tax credit was applied to the development of Chicken McNuggets.
Because of the way the credit is structured, it helps some companies less than others. And some suspect that, since its passage in 1981, it has funded at least some research that would have gone on anyway.
"I don't know of any actual evidence to that effect, but I'd be amazed if they didn't, within the limits of the law, push it as hard as they could. That's human nature, and I think it's an acceptable cost," said B. Kipling Hagopian, a California venture capitalist and a member of President Reagan's commission on industrial competitiveness.
The rationale for a tax credit for research is that, unlike most other kinds of economic activities, the benefits of research don't accrue only to the company that does the work. Once a new product or method has been developed, it can't always be protected by patent laws. So the tax credit gives an extra boost.
"It raises what you might call the hurdle rate," said Rep. Ed Zschau (R-Calif.). "Projects you might not be able to undertake become more attractive."
Economists, even those of the stingier strain, tend to favor a government role in R&D for that reason. So, perhaps for more self-interested reasons, do business people. But, they say, actually quantifying whether the credit has turned on projects that might not have made it otherwise is difficult.
"People know when they do R&D that it's less expensive. But they can't say, 'I built that particular machine because of the credit,' " said Michael Rashkin, tax director of Apple Computer Inc. "You don't go around saying, 'Thank God for the R&D credit.' "
Investments, in other words, are not just driven by tax factors. The state of the economy and of a particular industry, the potential payoff of a research effort and the company's resources also affect research decisions. Larry Langdon, director of tax and distribution for Hewlett-Packard Co., said taxes usually rank third or fourth in order of importance in decision-making.
Use of the credit has expanded rapidly in the last three years, and the numbers seem to support the contention that companies have done some reclassifying to make use of it.
From 1980 to 1981, the first year the credit was in effect, corporate research spending reported on tax forms went up 40 percent. By contrast, companies told the National Science Foundation and other sources that their R&D spending rose between 10 and 15 percent for the same period. Figures for later years are not yet available.
Robert Eisner, a professor of economics at Northwestern University and a leading critic of the credit, says that reclassification won't go on indefinitely. Companies can't continue switching work from one budget category to another. But "we'll have to keep examining whether they find new ways" of using the credit without really increasing the level of research, he said.
A study by the General Accounting Office found that 36 companies of 209 surveyed claimed the credit all three years examined: 1981, 1982 and 1983. The amount they claimed rose rapidly -- from $89 million in 1981 to $122 million in 1982 to $193 million in 1983.
Total revenue losses because of the credit also have skyrocketed. Early in 1983, the Joint Committee on Taxation predicted that its use would cost the Treasury $650 million in 1984. A year later, the estimate had gone up to $1.5 billion for the same year.
The credit was used not just by such high-tech industries as electronics and aerospace but also by firms in the fast-food, publishing, oil, machinery and movie-production industries. Service industries such as banking and health services also claimed it. The credit subsidized research and development of such products as drugs, food products, smoke detectors, oil seals, computer software and brakes, according to the Government Accounting Office.
Proponents of extending the tax credit want to narrow its scope. Legislation introduced in the House and the Senate would prohibit use of the credit for "style, taste, cosmetic or seasonal design factors," and narrow the definition of qualified research in other ways.
"The whole objective of the research-and-development credit should be to get it honed in on true, fundamental, basic, cutting-edge research in this country," said Assistant Treasury Secretary Ronald A. Pearlman.
There are some differences, however, between what the Treasury wants and the more expansive goals of the high-tech lobby and its allies in Congress such as Zschau, Rep. J. J. Pickle (D-Tex.) and Sens. John Danforth (R-Mo.) and Lloyd Bentsen (D-Tex.).
Also working with the Coalition for the Advancement of Industrial Technology are former Carter administration domestic policy chief Stuart E. Eizenstat and domestic policy adviser Simon Lazarus III, and former representatives Jack McDonald (R) and Dawson Mathis (D).
The legislation pending in Congress would make the tax credit permanent and expand its availability to companies just starting up, joint ventures, more software development and corporate contributions to university research. The Treasury prefers a three-year extension to continue evaluating the effectiveness of the credit, and it has not endorsed the university expansion.
Neither group, however, has proposed dealing with what some experts say is a fundamental problem with the credit: Because it is incremental -- paying only for increases in R&D spending -- its availability depends on how much a company has spent on research in the base period of the three preceding years.
So if a company raises its R&D spending dramatically one year, that pushes up the base for calculating whether the credit can be taken for increases in R&D spending in the following years. If a firm cuts its R&D, on the other hand, it might not be eligible for a credit for increases the following year if the level of spending is still below the base average.
As it is currently structured, the credit actually subsidizes about 5 percent of new R&D spending rather than 25 percent, according to calculations by Jane G. Gravelle of the Congressional Research Service.
Possible solutions include making the base an industrywide average instead of being company-specific, or providing a flat, but smaller, credit for all R&D spending. So far, however, neither one of those seems to be in the political hopper.