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Tech Companies Eye Tax Incentives
With the red-hot U.S. economy slowing and President Bush's trillion-dollar-plus tax package tempting Congress, lawmakers are eyeing ways to jumpstart growth by linking corporate tax relief to an otherwise consumer-oriented tax proposal.
High-tech companies of all sizes are reporting sluggish earnings and predicting a dim future. Waning demand for technology products could lead to an even greater decline in the economy because technological advances largely have been responsible for productivity increases in other sectors of the economy, such as the manufacturing and service industries, reports show.
"There is a lot of evidence to suggest there is a dramatic slowdown under way," said James Lucier, Prudential Securities analyst. The question is whether a corporate tax cut should be given purely for its potential to stimulate growth or whether lawmakers should undertake a more comprehensive structural reform.
"Now there is less confidence that through fiscal or monetary policy you can add hot or cold water to keep the bathtub at the optimal temperature," Lucier said.
The Bush administration appears cool to the idea of corporate tax relief and has indicated leanings toward addressing the structural problems with the tax code rather than employing short-term measures to jumpstart the economy.
President Bush has made it clear that he wants to focus on the American people with this $1.6 trillion tax cut. "I am going to resist the Christmas-tree effect of tax policy. I don't want people putting ornaments on my plan," Bush said at his first presidential press conference last week, adding that he has "made it clear to business interests that the best tax policy is the one that reduces burden on the people."
However, the president does favor one corporate tax measure — making the research and development tax credit permanent. Bipartisan support for the measure makes it likely to pass, but Congress is going to be asked to mull other corporate tax relief, such as reform of depreciation schedules and repeal of the alternative-minimum tax rate.
Optimistic Outlook For R&D
At the beginning of this session, House and Senate lawmakers once again introduced bills that would make the research and development tax credit permanent. Reps. Nancy Johnson, R-Conn., and Bob Matsui, D-Calif., introduced the House measure, and Sens. Orrin Hatch, R-Utah, and Max Baucus, D-Mont., introduced a Senate companion bill.
The bills are numbered H.R. 41 and S. 41, designations that represent Section 41 of the tax code, the portion that addresses research and development.
Last June, the R&D tax credit expired and Congress voted to renew it for five years, the longest reauthorization since the measure's creation in 1981. The probability that the R&D tax credit will be made permanent this year is "much, much higher than 50-50," Matsui recently said at a tax forum, and a source familiar with Senate proceedings also is optimistic. Bush campaigned on the issue of R&D permanency and recently has backed it, aiding its chances of approval.
Providing long-term reassurance that the credit will be there could stimulate the economy. "There is a big bang for the buck on R&D," said Monica McGuire, senior policy director of taxation at the National Association of Manufacturers, adding that studies show that two-thirds of productivity gains stem from technological advances.
"Rapid advances in R&D will make those products obsolete more quickly," said Jim Shanahan, a partner with the accounting firm PricewaterhouseCoopers.
The Depreciation Debate
Research and development leads to new innovations and products. In turn, equipment quickly becomes outdated, which sources say leads to the need for another type of tax reform: changes in the depreciation schedules in the tax code.
Depreciation is the decline in value of an asset over time. For example, in the year it is bought, a computer is calculated at its purchase price when a company evaluates its assets, and each year the value of that asset declines. In the case of computers, the useful life is set at five years. But depreciation schedules have not been updated since the 1980s.
Last year, lawmakers introduced a number of bills that would have amended the depreciation schedules for different items. Rep. Jerry Weller, R-Ill., introduced a bill that would have allowed a company to write off the value of a computer in one year instead of over five.
This year, Weller plans to examine depreciation reform for technology assets more broadly. "If there is concern about the economy sputtering, having rapid depreciation ... would be very, very helpful in jumpstarting the economy," Shanahan said.
But he questioned whether wholesale reform of the depreciation schedules was feasible "given the overall constraints that Congress will have in terms of the revenue costs." Picking and choosing among capital expenditures also would be difficult, he said.
In a report issued to Congress this summer, the Treasury Department noted that the current depreciation system is dated and can cause market distortions but added that comprehensive reform "faces serious practical problems." There is no good data on the realistic lives of equipment, and compiling that information would be an expensive and time-consuming process, the report said.
Supporters of depreciation reform do not expect Congress to finish the job this session, but they are pleased that Weller plans to open the discussion. "It often takes a year's worth of hearings and set up to focus on a comprehensive package," Lucier said, and signals from the White House indicate there will be chances to tackle corporate tax issues later.
Outcry Against The AMT
Tax-reform advocates also want to reform or repeal the alternative-minimum tax (AMT), which is a parallel tax system designed to insure that corporations pay a minimum level of income taxes. Corporations must calculate their taxes at two rates, under AMT or the regular tax, and pay the highest rate.
The problem with AMT is "it kicks companies in the gut when the profits are down by imposing a higher tax burden when they can least afford it," NAM's McGuire said. The AMT system prevents a company from using R&D and other tax credits, and will impose a slower depreciation schedule on certain equipment.
In early February, Rep. Phil English, R-Pa., reintroduced a bill, H.R. 437, that would repeal the AMT.
During the last recession, 50 percent of the largest companies paid rates at AMT levels. When profits are low and research tax breaks are off limits, it "takes away the incentives to invest," McGuire said.
However, the Treasury report notes that "corporate AMT has declined dramatically in importance in recent years," in part because of the strong economy and in part because of statutory changes that have reduced the changes in depreciation under AMT and the repeal of AMT for small corporations.
But McGuire said the slowing economic conditions could prove an impetus for Congress to take another look at the issue. "The urgency of repeal is more relevant when you are on the verge or beginning to go into an economic downturn," she said.
Light At The End Of The Tunnel?
Lucier does not have much hope for corporate tax relief this session. Bush is intent on providing tax relief for consumers, and his policymakers want to build consensus on more fundamental reform.
Bush has asked corporations to be patient, urging them to get behind his tax package and offering corporate relief "as a carrot at the end of a very long stick," Lucier said.
 | - by Teri Rucker |
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