America's high-technology industries and entrepreneurs initially appear to be among the big winners in President Reagan's proposed tax reform.
"We expect to work aggressively for its passage into law," said Ralph Thomson, vice president of government relations for the American Electronics Association. "We're logging on, and we're going to be working heavily on the Hill."
Thomson and other high-technology boosters -- who point out that their companies now pay a much higher corporate tax rate than the average -- expressed glee that Treasury II preserved the two main benefits the industry had sought: capital gains protection and an extension of the research and development tax credit.
Indeed, said Thomson, "we got more than we asked for" in that the top capital gains rate actually was cut from 20 percent to 17.5 percent. Under Treasury I, capital gains would have been taxed at effective ordinary income rates -- a proposal that had prompted cries from the venture capital industry that a vital financial incentive for entrpreneurism would effectively be eliminated.
Treasury II also extended the R&D tax credit -- set to expire this year -- for another three years. High-technology supporters, who consider this benefit crucial, say they will press to make the credit permanent. Failing that, they will push to extend it to five years, arguing that it will encourage more long-term research and development.
However, one pressing question high-technology companies have yet to answer is whether lower proposed tax rates and the change in the depreciation schedules can compensate for the loss of the investment tax credit.
That question is particularly important for high-technology companies because they usually rely on expensive high-technology capital equipment that quickly becomes obsolete.
Daryl Hatano, government affairs manager for the Semiconductor Industry Association, said Treasury II would depreciate most capital equipment investment over a far longer span of time than high-technology companies can under current law.
"The question is what is the real useful life of this equipment?" said Hatano. "We need that question settled up front."
Hatano said that Treasury officials are aware of the semiconductor and computer industry's concerns but that they want to deal with those concerns in tax regulations to be issued later. "But that could take years," said Hatano.
Overall, Hatano said the SIA is "cautiously optimistic" about the plan given that "with Treasury I, we were hit with a real tax loss."
"I think it's better than Treasury I," said Robert H. Perlman, director of tax and customs for Intel Co., a Santa Clara-based semiconductor company, "but I'm not sure it's much better."
Perlman took particular issue with the foreign tax credit provision, which would require companies to itemize tax credits country-by-country rather than treating them as an aggregate. "That's administratively a nightmare," said Perlman. "Anybody who says that and tax simplification in the same breath is blowing smoke."
Another concern is the controversial new "recapture" provisions that work against companies that have taken advantage of rapid depreciation in the past.
Paul W. Oosterhuis, a tax specialist with the AEA, said that the recapture proposal "doesn't work with high-technology companies."
Oosterhuis criticized the Treasury's recapture provisions that use a 12-year depreciation schedule rather than the five years that would be more sensible for the kinds of capital investments made by high-technology companies. Oosterhuis maintained that resolving that question for high-technology capital equipment investment will be "a major and difficult issue" to resolve.