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REP. STARK PROMISES TAX ATTACK ON DRUG INDUSTRY IN 1991 ON THREE FRONTS: R&D TAX CREDITS, SEC. 936 BREAKS, AND DEDUCTIONS FOR AD AND PROMOTION COSTS

Executive Summary

House Ways & Means Health Subcommittee Chairman Stark (D-Calif.) is declaring a three-front tax attack on the drug industry in 1991. According to a Dec. 14 press release, Stark promises...to continue to seek an end to R&D tax credits for the industry, to push for the repeal of Sec. 936 Puerto Rico/Caribbean tax credits, and...to work for the revocation of tax deductions for advertising and promotional spending beyond approved FDA standards. Close on the heels of Sen. Kennedy's (D-Mass.) two days of promotion, marketing and advertising hearings, Stark released a press statement to reiterate his interest in the pharmaceutical industry. "Tax breaks to help a struggling industry to provide reasonably priced products to the ill and needy might make sense," Stark declared. However, he attacked "tax loopholes for the American pharmaceutical industry" as making "no sense at all." Armed with data from a recently completed assessment of the R&D and Sec. 936 tax credits conducted by the Congressional Research Service, Stark declared that the pharmaceutical industry benefits from both tax provisions well above average manufacturing firms. "The pharmaceutical industry used the possessions tax credit 20 times the average amount used by all manufacturing firms combined," Stark maintained. The industry "used the R&D tax credit three times the average for manufacturing firms in general." The most timely of Stark's targets is probably the R&D tax credits set to expire at the end of 1991. In 1985, the last year for which data was available to CRS, the drug industry claimed over $87 mil. in tax credit from the R&D provisions. That figure was over 5% of the total tax credits for R&D expenditures across all U.S. industries. The 1985 figures come at the beginning of the recent five-year surge in drug industry R&D budgets and may understate the size of the credits to the drug industry. The Puerto Rico/Caribbean Basin tax breaks are much more significant to the drug industry. The CRS study calculates the most recent savings (in 1987) at $1.4 bil. -- double the credits of only four years before ($615 mil. in 1983). The figures collected for Stark show the extent of the stakes for the drug industry in the Puerto Rico statehood/commonwealth/independence debate working its way torturously through Congress. The CRS figures show that the drug industry received over half of the tax credits from Sec. 936 in 1988. The drug industry's actual credits declined somewhat in that year from almost $1.5 bil. the year before. Stark has been a well-placed gadfly to the drug industry for the last several years. His proposals, such as the triplicate prescription form, have not made it into final bills, but they have created a harsh climate for the industry. His avowed interest in the tax issues means that those issues will have a vociferous advocate in the upcoming year. The Dec. 14 press release notes that "in the 101st Congress, Stark introduced legislation to deny R&D tax credits to the drug manufacturing industry if their rate of inflation was excessive." The congressman "plans to introduce legislation in the 102nd Congress to deny tax deductions for various forms of drug advertising that do not convey standard FDA required medical information." Details of the legislation have not been decided, staffers say. The CRS study backs up its analysis of the size of the industry's R&D tax credits by bringing up the issue of expensing R&D costs as incurred. "Because a tax deduction is worth more to a firm the sooner it is taken, and because accurate measurement of income would require amortization, the expensing of R&D costs constitutes a tax benefit," the CRS study maintains.

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