ITIF Urges Congress to Renew and Extend the R&D Tax Credit and Bonus Depreciation

October 26, 2015

WASHINGTON—The Information Technology and Innovation Foundation (ITIF) today urged Congress to retroactively renew and then make permanent two tax provisions that are essential for spurring innovation and creating high-paying jobs—the research and development tax credit and bonus depreciation. ITIF argued in a new report that the provisions more than pay for themselves by encouraging the kinds of research and capital investments that drive economic growth.

“Congress has a long to-do list in the next few months to get the country’s fiscal house in order, but passing these critical tax provisions should be a top priority,” said Joseph V. Kennedy, ITIF senior fellow and author of the report. “The R&D tax credit and bonus depreciation are some of the most impactful ways Congress can use the tax code to encourage companies to increase research and capital investment. Without pioneering new ideas and equipment, innovation and productivity will be stuck in neutral. It is these types of investments that made America an economic powerhouse in the 20th century. Policymakers should double down on that investment in the 21st century if they want the country to continue leading.”

ITIF’s analysis—titled “Congress Needs to Pass Tax Extenders That Encourage Investment and Jobs”—details the economic benefits of these two “tax extenders,” so named because they expire periodically and must be extended if they are to remain in force. While Congress has renewed both the R&D tax credit and bonus depreciation many times in the past, it let them expire at the end of 2014. So ITIF argues policymakers now should make them retroactive to the beginning of 2015 and extend them through 2016 at the very least.

The report explains how the R&D tax credit reduces a company’s tax payments as it increases spending on research and development that accrues to the benefit of the public at large. In fact, studies have found that the R&D tax credit yields a two-to-one return for tax payers, as every dollar’s worth of credit produces two dollars’ worth of research investment.

ITIF goes on to argue that bonus depreciation—which increases the value of the tax deduction companies get for investing in new capital equipment—also spurs innovation and other economic benefits. In fact, research suggests that a 10 percent decline in the cost of capital should cause investment to rise by 5 percent. Furthermore, in a given year, bonus depreciation increases GDP between 0.07 percent and 0.14 percent and creates between 100,000 and 200,000 jobs, while also driving up wages.

The report argues that despite the constrained federal budget environment, retroactively renewing and extending these provisions is well worth the cost. First, programs that increase economic growth such as these will actually improve U.S. fiscal health, offsetting any short-term budget impact. Second, if these provisions are not extended retroactively, Congress sends a signal to the market that incentives to invest might go away. This uncertainty discourages investment and inevitably hurts U.S. economic growth and prosperity.

“Letting these programs lapse would be pennywise and pound foolish,” said Robert D. Atkinson, ITIF’s founder and president. “It would save a few dollars today, but in the long run it would stunt economic growth. These two tax extenders are some of the best tools America has to restore research and capital investment. And unless Congress renews them, the economy will continue to perform below its potential.”

Read the report.