On Wednesday Sept. 8, President Barack Obama is scheduled to give a speech in Cleveland, Ohio, where he is expected to provide a more detailed plan for economic recovery, a plan that is likely to include tax incentives for businesses. One incentive that he is expected to bring up in his speech is to ask Congress to approve $100 billion to expand and permanently extend tax credits for businesses that invest in research and development (R&D). That would be welcomed news for businesses overall and for pharmaceutical and biotechnology firms specifically.

Since its creation in 1981, the R&D tax credit has been extended more than a dozen times by Congress but has not been made permanent. Businesses have contended that subjecting the R&D tax credit to political uncertainty is not good for business and provides an incentive for businesses to locate R&D abroad where such incentives are part of established fiscal policy. The R&D tax credit expired at the end of 2009, and although there have been proposals this year in Congress to extend the tax credit, no final legislation has been approved despite broad business support.

The R&D Credit Coalition is one such group that has been urging Congress to extend the traditional R&D tax credit and for making the tax credit permanent. The R&D Credit Coalition is a group of more than 100 trade and professional associations, which includes the Pharmaceutical Research and Manufacturers of America and the Biotechnology Industry Organization, along with small, medium, and large companies in other sectors, including aerospace, agriculture, chemicals, electronics, energy, information technology, manufacturing, medical technology, software, and telecommunications. In addition to making the R&D tax credit permanent, the coalition is also seeking a 20% simplified credit. In December 2009, the coalition sent a letter, signed by 5300 employees in the sectors that the coalition represents, to both houses of Congress to urge Congress to take action.

Earlier this year, Lawrence Sloan, president and CEO of the Society for Chemical Manufacturers and Affiliates (SOCMA), observed the difficulties, particularly for smaller companies, in not having the R&D tax credit made permanent. He made his comments in March 2010 following a move by the Senate to extend the R&D tax credit for one year. SOCMA is the US-based trade association representing batch and custom manufacturers, including contract manufacturers of active pharmaceutical ingredients and intermediates. “Not knowing whether the R&D credit will be extended makes it harder for companies of all sizes to manage their research budgets and could even lead some companies to locate research projects in foreign countries with more attractive incentives,” said Sloan in a Mar. 11, 2010 SOCMA press release. “Failing to extend these and other expiring provisions is an effective tax increase on the many individuals and businesses across the nation that are represented by SOCMA.”

For the pharmaceutical industry and its suppliers, as well as business in general, making the R&D tax credit permanent is a good policy move. If the President does indeed make the proposal to make the tax credit permanent, onlookers will also be evaluating how the government may be planning to pay for the credit through other tax changes. Some have speculated that the President will also ask that the simplified R&D tax credit be increased from 14% to 17%.

There is always much political debate on ways to encourage innovation, job growth, and the overall performance of the US economy. Making the R&D tax credit is one step in that direction.