A bipartisan group of lawmakers in Congress proposes to help companies that engage in “life sciences” research by combining two terrible tax policies — the research and experimentation (R&E) credit and a tax holiday for repatriated offshore profits — into one monstrosity.
The bill, which has been introduced by Senator Robert Casey (D-PA) in the Senate and Devin Nunes (R-CA) in the House, gives the pharmaceutical and biotech companies, and some companies that make medical devices, two options. They could take a special 40 percent R&E credit (which would be double the value of the existing R&E credit) for up to $150 million in research expenses.
Alternatively, they could repatriate up to $150 million in offshore profits, which would be taxed at just 5.25 percent instead of the normal 35 percent that applies to corporate profits. This would particularly benefit pharmaceutical companies and others who are notorious for using intellectual properties to shift profits to offshore tax havens. The bill would allegedly require the repatriated offshore profits to be used for the research.
A coalition of companies that would benefit is promoting the bill.
Neither of the tax breaks offered under the bill would create jobs.
The R&E Credit Rewards Companies for Research They Would Do Anyway
The R&E credit, introduced during the Reagan administration, has been the subject of many tax scandals as companies have tried, often successfully, to treat activities that are obviously not scientific research — such as developing hamburger recipes or accounting software — as qualified R&E.
The R&E credit has a curious following among politicians who normally style themselves as free-market advocates, but who nevertheless maintain that big business needs to be subsidized to do research. In fact, a 2009 report from the Government Accountability Office found that “a substantial portion of credit dollars is a windfall for taxpayers, earned for spending they would have done anyway, instead of being used to support potentially beneficial new research.”
The Repatriation Holiday that Will Actually Reduce Jobs in the U.S.
A separate coalition of companies has been promoting a repatriation holiday for months, but has lost steam in the face of estimates that their proposal would cost $79 billion, partly because companies would respond by shifting even more of their jobs and profits offshore. Congress tried this type of measure in 2004, and the Congressional Research Service found the benefits went to corporate shareholders and not towards job creation.
The new proposal is different in that it would target the repatriation holiday at companies that engage in “life sciences” research, and couple it with an increased R&E credit. But none of this makes the repatriation holiday any less ill-advised.
The requirement that repatriated funds must be put towards life sciences research simply won’t work because money is fungible. A company can put the money towards research it would have done anyway, which would free up other money to pay larger bonuses or for any other purpose. In fact, Martin Regalia, a senior vice president for the U.S. Chamber of Commerce, said at a panel discussion on March 25 that because money is fungible, you cannot really direct a company to do any particular thing with cash it receives.
It’s Not Enough for Lawmakers to Say They’re Doing “Something” to Create Jobs
Some members of Congress are desperate to appear to be creating jobs while knowing full well that Tea Party-backed lawmakers will block the sort of spending programs that actually can create jobs. Some of them have settled on this proposal, hoping that it includes a large enough tax giveaway to win over the “life sciences” companies (and their lobbyists and campaign contributions).
For these companies, each batch of grim unemployment data must seem like an opportunity. They are increasingly able to request tax breaks in the name of “job creation” that will never happen.
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