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ADMINISTRATION’s R&E TAX CREDIT PROPOSAL WOULD MAKE CREDIT PERMANENT AND USE 100% OF COSTS IN CALCULATIONS; SPEED-UP OF BIOTECH PATENT REVIEWS PLANNED

Executive Summary

The Bush Administration's budget proposal would make permanent the research and experimentation tax credit and allow firms to use 100% of applicable expenses to calculate the credit. The "bluebook" outlining the federal budget states: "The Administration proposes making permanent the R&E tax credit...[and] allowing 100% (rather than 75%) of the total research expenses for a year to qualify for purposes of computing the credit for all years after Dec. 31, 1989." Last year, the Administration failed to push through a permanent extension of the R&E tax credit, which allows a 20% tax credit for certain R&E spending that exceeds a base amount. Congress was able to agree only on a one-year extension, to Dec. 31, 1989, and specified further that just 75% of research expenses could be used for computing the credit. The credit would not modify the current method for calculating the base spending level, which reflects R&E spending over previous years adjusted by average gross sales over those same years. The Administration projects that the credit extension proposal would reduce federal tax receipts by $100 mil. in FY 1990; $500 mil. in 1991; $900 mil. in 1992; and $1.1 bil. in 1993. The proposal would similarly modify how multinational companies calculate R&E spending for tax purposes. Presently, companies may allocate 64% of domestic R&E to domestic operations and 64% of foreign R&E spending to foreign operations, with the remainder allocated based on gross sales or, with limitations, on gross income. Congress extended these rules for tax years beginning before Aug. 2, 1990, but the allocation formula applies only to 75% of domestic R&E expenditures. Under the Administration's proposal, "the rules...would be permanently extended for tax years beginning after August 1990, and would allow 100% (rather than 75%) of U.S. expenditures to be covered for all tax years beginning after that date," the document explains. The extension of the R&E allocation rules would further reduce receipts by $400 mil. in 1991, $700 mil. in 1992, and$800 mil. in 1993. Biotechnology research support is also emphasized in the Administration's budget review. Biotech, space exploration, and development of the Energy Department's Superconducting Super Collider are singled out in a special chapter of the budget review as efforts that "expand the frontier of human knowledge." The Bush Administration proposes "hiring 100 new biotechnology patent examiners over five years, consolidating all biotechnology examining responsibilities, and improving training for examiners." In addition, the Patent and Trademark Office is "on track to meet its goal of reducing the average biotechnology patent processing time to 18 months by 1992, bringing the pendency for these patents in line with overall rates," the budget plan maintains. It notes that the PTO joined with industry to create the Biotechnology Institute to strengthen the expertise of patent examiners. The Industrial Biotechnology Association helped found the institute. The document also voices support for shortening FDA review times for biotech products, but calls for the establishment of user fees to pay for the improvements ("The Pink Sheet" Feb. 5, p. 10). The Administration does not give a specific timeframe for shortening reviews. The Administration also projects that the vaccine injury compensation trust fund will spend $221.5 mil. in 1991, including $217 mil. in claims. Claims compensation includes $62.9 mil. for pre-1989 injuries and $154 mil. for later claims. In addition, the Public Health Service, the U.S. claims court and the Justice Department are each allocated $1.5 mil. for claims processing administrative costs. The Administration is requesting legislative authority to use trust funds to pay for these administrative costs.

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