EDITOR'S PAGE

Renew the R&D credit!

When I first read the story, I squinched my face and muttered, "huh?" It seemed like a no-brainer, an investment in the future, but then again we were talking about the U.S. Congress, known to some as Pork-Barrel Hill. What elicited my disbelief? Recent public pleas from SIA, SEMI, and a parade of other manufacturing associations and companies that the U.S. R&D tax credit be extended and, if possible, be made permanent.

Seems the same credit, which has been extended mostly for one-year increments since its inception in 1981, will expire unless lawmakers act soon. If Congress doesn't vote for another extension by June 30, the credit will be discontinued, and one of the main incentives for American technology companies to keep their research and development at home will disappear, at least temporarily.

The benefits of strong domestic R&D spending—job creation and security, innovation leadership, emerging technologies spawning new industries—seems like an overwhelmingly popular policy choice, an issue both sides of the aisle could agree on, which in fact they have over the years. Caroline Graves Hurley, a consultant to SEMI at its Washington, DC, office, says that there is no opposition to extending the R&D tax incentive, yet it still stands a good chance of lapsing. The break, this time with an 18-month extension, is part of the one monster tax bill being seriously considered in Congress. "But," she notes, the bill is "the only train [the tax break is] traveling on, and [the bill is] fraught with political difficulties. I have very little confidence that action will be completed by June 30."

The problem is what's called "costing" in Beltway-speak, according to Hurley. It's not because the benefits of the R&D tax break haven't been proven manyfold, but that the federal government stands to "lose" billions of dollars in tax revenues. Some have guesstimated the amount at up to $80 billion scored over a decade, or roughly $8 billion a year.

But a 1998 study from Coopers & Lybrand says that "innovations from additional R&D investment . . . begin to increase productivity almost immediately, adding more than $13 billion a year to the economy's productive capacity by . . . 2010." The return on investment on R&D is obvious, especially in the fast-paced, innovation-rich semiconductor and advanced microelectronics manufacturing arena.

The R&D credit is not a thinly veiled tax loophole that benefits only the richest corporations or a handful of industries. In fact, an April 2004 study from Ernst & Young shows that a fairly even spread of companies, from those with assets under $1 million to those with over $250 million, have benefited. The little guys get the most bang for the buck, measured as a percentage of their average assets. The same report finds the credits distributed across all industrial sectors, although manufacturing garners far more than other groups—68.6% of total credits—with information a distant second at 16.2%.

Almost every other country that aspires to industrial excellence doles out generous tax incentives, subsidies, and other breaks. In the chipmaking sector, you don't have to look too far for governments allocating funds to create jobs or pump up companies' competitiveness. Recent examples include the South Koreans' billion-dollar "bailout" of Dongbu Electronics by a group of banks led by a state-owned Korean bank, the disputed value-added tax benefits granted by the Chinese to homegrown manufacturers, and the hundreds of millions of euros that the German and Saxon governments have awarded to AMD to build fabs in Dresden. France Telecom, a nationalized company, still owns a piece of STMicroelectronics, while the Singapore Economic Development Board controls a percentage of Systems on Silicon Manufacturing (SSMC).

SIA president George Scalise's stand on the issue has a familiar ring. "With foreign countries aggressively seeking to attract semiconductor design centers and R&D activities to locate abroad, action to make the U.S. tax credit permanent is urgently needed. . . . R&D jobs are among the highest paying in the microchip industry, thus making such activities a prime target for countries seeking to outsource American jobs." Scalise says that U.S. chip companies spent about $14 billion, or 17% of sales, on research and development in 2003.

Although I believe in a global economy, I also think it's intrinsically obvious that the U.S. government should give some aid and comfort to the very manufacturing base that has helped create this country's prosperity. To the American readers of MICRO, I strongly urge you to contact your Congressional representatives and implore them to re-enact the R&D Tax Credit before it lapses. (For more information, go to the R&D Credit Coalition's Web site at www.nam.org/RnDCredit.)