A proposal by President Barack Obama to expand and make permanent a tax credit for companies that perform research and development in the U.S. drew a range of reactions from medical-technology companies and analysts.
A waiting game
Industry gives mixed reviews on R&D tax credits
Obama unveiled the proposal last week as part of a larger package of business incentives that are meant to help jump-start job creation and, in the case of the R&D tax credit, spur product innovation.
The R&D provision would make permanent the nearly 30-year-old tax credit, which has had to be renewed by Congress since its introduction in 1981 and expired earlier this year. Medical technology company executives are hoping to get the credit renewed in time for the 2010 tax season. “The fact that this would actually extend the credit permanently would take away a lot of the uncertainty that currently exists,” said Lisa Larkin, director of consultancy for Deloitte’s biotechnology tax division. “Right now, we’re nine months into 2010 and the credit hasn’t been extended, and that causes uncertainty in companies’ R&D planning and hiring.”
The Obama administration said its proposed increased credit would allocate about $100 billion in tax breaks over 10 years to companies that invest in domestic R&D.
Industry reaction was mixed.
In a statement, officials at medical-device maker Medtronic said they welcome the proposed legislation, and that the R&D credit has helped encourage medical technology innovation and job growth.
But Jon Burkhardt, a consultant for Frost & Sullivan’s healthcare and life sciences division, said while the tax credit would be helpful to medical technology companies, he’s not convinced it alone will boost R&D activity and hiring. “In terms of stimulating effects, it’s probably not going to do much,” he said. “These companies are still uncertain and need reassurance” about the economy and effects of healthcare reform.
The R&D credit also has limitations in that not all medical-product companies would be eligible for it. “The whole idea of a tax credit is that you have a company that is paying taxes, which means they’re making money,” said Mark Heesen, president of the National Venture Capital Association. “There are a whole lot of biotech startups that aren’t making money, so they won’t benefit,” he added.
Ellen Dadisman, spokeswoman for the Biotechnology Industry Organization, agreed in part, saying her group is pushing for other incentives, such as an extension of the $1 billion Therapeutic Discovery Tax Credit program, which could benefit small business. The incentive, which was included in the healthcare reform law, allowed small businesses to take credits in the form of National Institutes of Health grants that will be issued based on the 2009 and 2010 tax periods. Dadisman added, however, that the proposed R&D tax credit can also be a benefit to small businesses. “Small companies can claim and carry the tax credit forward” and use them to offset taxes on future revenue, she said.
But while a number of manufacturers and investors see significant benefits in the R&D credits, some critics are concerned about a proposal to pay for the tax breaks by closing tax loopholes that benefit companies that move jobs and R&D overseas.
Some stakeholders are taking a wait-and-see attitude before voicing their views on the proposal. A spokeswoman for the Pharmaceutical Research and Manufacturers of America said that the group was reviewing the details of the proposal, and that PhRMA had not yet taken a position.
In its own statement, the Advanced Medical Technology Association, a medical device industry lobby group, said it has previously supported making the R&D tax credit permanent, but that it was not yet prepared to take a position on the current proposal. “The White House has not yet released details on how the proposed increases would be funded and what other tax changes might be involved,” said the AdvaMed statement. “Those details are important and without them it would be premature to comment in great detail on the proposed changes.”
Dean Zerbe, national managing director of the tax specialty consultancy AlliantGroup, said he expects continued conversation around R&D incentives, and that there are likely to be additional proposals put forward. “This is a fine start, but it’s not the end-all, be-all of what can be done,” Zerbe said. “I’d keep the champagne on ice. I wouldn’t pop it yet if I were a biotech or medical-device company.”
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