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CongressNow: On Taxes, Obama Promises a Few Business Breaks

If Sen. Barack Obama (D-Ill.) hopes to win support this fall from the business community — a constituency that has often chafed at Democratic tax policies — his proposal to make permanent the research and development tax credit constitutes a bold gesture, but it may not be enough to get business to overlook the rest of his platform.

The R&D tax credit expired on Dec. 31, 2007, for the thirteenth time since its enactment in 1981. As in the past, Congress is expected to approve at least a one-year extension, likely in a rushed and messy end-of-the-session bill. The annual efforts to renew the tax break — which offers a vital and politically popular boost for manufacturing companies — drive companies and their lobbyists crazy, as their budget planners race the clock against Congressional delays and infighting to make sure the tax break is renewed.

That’s why a permanent tax break would be desirable for business. According to Obama’s plan, making the tax credit permanent would encourage businesses to invest in domestic R&D over multiyear time frames. The plan proposed by Sen. John McCain (Ariz.), the presumptive GOP presidential candidate, offers a permanent tax credit tied to wages.

Supporters of the R&D tax credit say its expiration poses a $9 billion tax hike on innovation for the nearly 18,000 companies that use the credit.

“I think that it’s terrific that both presidential candidates recognize the value of R&D,” said Monica McGuire, senior policy director for taxation at the National Association of Manufacturers. “It’s hard for companies to make R&D budget plans, not knowing when the R&D credit is going to expire.”

Beyond permanency, manufacturers and lobbying groups that are advocating for a permanent R&D tax credit also want to see the credit strengthened to increase America’s competitiveness with trading partners who offer their companies more generous R&D incentives.

The R&D Credit Coalition, of which NAM is a member, argues that growth of the U.S. economy is closely tied to the ability of companies to make a sustained commitment to long-term, high-cost research.

The U.S. Chamber of Commerce also supports extending and broadening the tax credit and is working to motivate Congress to extend the credit when lawmakers return in September.

“Ultimately, everyone would like to see it permanent,” said Ashley Miller, director of Congressional affairs for the Chamber, even though “the political reality is that it would be extended for at least one year.”

The rub with Obama’s R&D tax proposal is that it comes with other provisions that make business uneasy. Obama would repeal tax breaks and loopholes that reward corporations that retain their earnings overseas. He proposes using those savings to lower the corporate tax rates for companies that expand or start operations in the United States.

Obama’s Treasury secretary, whoever that may be, may well have a tough time swaying the business community in favor of his tax policy changes, despite the presence of several items, such as R&D tax credit permanency, that businesses like. Former Treasury Secretary Lawrence Summers and Timothy Geithner, head of the New York Federal Reserve Bank, are among the names that have been mentioned as possible Treasury secretary picks.

The Chamber, which represents a broad coalition of business groups, said that Obama’s overall tax plan is too broad to support. Usually, other leading business groups line up alongside the Chamber on matters of tax policy.

“His overall package is just too hard for us to swallow,” Miller said.

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