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R&E TAX CREDIT WOULD BE PERMANENT AND EXTENDED TO COVER 100% OF APPLICABLE RESEARCH IN BUSH BUDGET PROPOSAL; ADMINISTRATION CITES WEAKENED INCENTIVES

Executive Summary

The research and experimentation tax credit would become a permanent part of the tax code and be expanded to cover 100% of applicable research expenses in calculating the credit, under the Bush Administration's budget request for fiscal 1992. The R&E tax credit, established in 1981, was never made permanent, and though it was renewed by Congress in 1986, 1988, 1989 and 1990, the credit was at "a lower rate than originally granted," the budget document notes. Although the 1990 renewal, part of the Omnibus Budget Reconciliation Act, restored the 20% rate for incremental increases in R&D spending, it limited its application to only 75% of incremental cost increases. The Treasury Department projects that the permanent extension of the credit would reduce federal revenues by $ 500 mil. in FY 1992, $ 1 bil. in 1993, $ 1.3 bil. in 1994, $ 1.6 bil. in 1995 and $ 1.8 bil. in 1996. The temporary extension of the allocation rules could reduce revenues by $ 300 mil. in both fiscal 1992 and 1993. The Bush Administration budget also "proposes to extend for one year the rules, as modified in 1989 and extended in the Omnibus Budget Reconciliation Act of 1990, for the allocation of foreign and domestic R&E expenditures for companies with foreign operations." The proposal, the Administration says, "would allow 100% of U.S. expenditures to be covered rather than the current 75% . . . beginning Aug. 1, 1990, when the current rules expired." The Bush Administration budget proposal maintains that recent reductions in the R&E tax credit rate, "combined with reductions in corporate income tax rates and actual calculation of the credit, have the effect of reducing the incentive effect of the original credit by more than 50%." The Administration estimated last year when it proposed the same R&E tax credit provisions that the 1989 changes to the law would stimulate private research spending by about 4%. The budget "bluebook" covering the entire federal government says one of its "themes and priorities" is "enhancing research and development and expanding the human frontier." As in last year's budget, the Bush Administration is highlighting the National Institutes of Health, the project to map the human genome and support for biotechnology. NIH's proposed budget for FY 1992 is $ 8.8 bil., which represents a 6.6% increase over FY 1991. The proposal would allot $ 5 bil. of that amount to basic biomedical research and would limit the institutes to awarding 5,785 new and competing research project grants, the same number as last year. The cost of these grants would increase at the rate of inflation, 5.76% as measured by the Biomedical Research and Development Price Index. A total of 21,818 research project grants (competing and noncompeting) would be funded, up by 632 from 1991. At an HHS press conference following release of the budget, HHS Assistant Secretary for Health Mason was asked why the number of new and competing grants fell short of the 6,000 requested last year by Congress. Mason responded that the department is moving in the direction of 6,000 but is awaiting completion of NIH's financial management plan. Among NIH's larger institutes, the budget proposes $ 1.8 bil. for the National Cancer Institute, up from $ 1.7 bil. in 1992; $ 1.2 bil. for the National Heart, Lung & Blood Institute, up from $ 1.1 bil.; and $ 977 mil. for the National Institute of Allergy & Infectious Diseases, up from $ 907 mil. Nearly half of NIAID's funds are for AIDS-related research activities. NIH-wide funding for AIDS/HIV programs is set at $ 851 mil. for fiscal 1992, $ 47 mil. over the previous year. NIH's proposed budget to support the human genome project is $ 110 mil. NIH's budget for the gene mapping effort has grown from $ 28 mil. in 1989 to $ 87 mil. in FY 1991. The budget plan also would channel $ 59 mil. for the genome project through the Department of Energy, for a total project budget of $ 169 mil. In the area of biotechnology, the budget bluebook proposes that all HHS agencies spend a combined $ 3.6 bil. in this area in FY 1992, 8% above FY 1991.
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