Recently, the US Senate voted against a bill that would have made permanent the research and development (R&D) tax credit, thus dealing a blow to one of the pharmaceutical industry’s legislative priorities. The Pharmaceutical Research and Manufacturers of America and the Biotechnology Industry Organization have been agitating for Congress to make the R&D tax credit permanent. They argue that it would promote job growth. We certainly need it, but would the tax credit achieve this goal? Recent history seems to indicate otherwise.
In 2005, Congress granted companies a big tax break that they hoped would create American jobs. The pharmaceutical industry took advantage of the opportunity to bring $100 billion in foreign profits back into the country. But instead of using the money to increase its workforce, the industry began cutting jobs. That year, drugmakers began laying off tens of thousands of American workers, according to a 2007 New York Times article. This would be a bad year for that history to repeat itself, given how many people already have lost jobs in the past year or so because of the poor economy. Still more layoffs are to come, as evidenced by Bristol-Myers Squibb’s (New York) announced plan to cut 3% of its workforce.
Some public officials want drugmakers to pay more in taxes, not less. Montana’s Governor Brian Schweitzer claims that the industry avoids paying its fair share by using complex tax-sheltering plans to shift income earned in the US to overseas locations. For example, Merck & Co. (Whitehouse Station, NJ) transferred patents to a subsidiary in Bermuda, then paid that subsidiary tax-deductible royalties for those patents. In February 2007, Merck finally had to pay a $2.3-billion settlement to the Internal Revenue Service for this practice, according to the Los Angeles Times.
I’m not inclined to agree with drugmakers that the R&D tax credit should be made permanent. History has shown that the change would not necessarily create jobs, and I don’t think the favor is justified in light of many companies’ tax-ducking schemes. Making the R&D tax credit permanent would not be the right solution for the industry, the government, or patients. Let’s try to think of other ways to create jobs and spur innovation.