Editor's note: The new tax reform package approved this fall by Congress will affect the scientific community along with the rest of the U.S. economy. THE SCIENTIST talked with representatives of that community about important provisions of the law that. will shape the future of scientific research and development in academia, throughout private industry and in the public sector. Their comments have been combined into a question-and-answer format.
What will be the overall im-pact of tax reform on scientific R&D?
Most experts are hedging their bets. They believe corporate R&D expenditures will be driven far more by the future business cli-mate, competitive pressures on high-tech industries, and direct federal funding for R&D than by specific sections of the tax reform law. "It will take time to sort this out," noted Rolf Piekarz, section head of science and innovation policy for the National Science Foundation. "R&D may go up anyway, because of other factors, but less than it would have otherwise."
Investment decisions are made "in accordance with competitive-ness in the marketplace," said Philip Speser, executive director of the National Coalition for Science and Technology, which lobbies for increased science funding. "The tax code has the greatest impact at the margins (situations in which a company is uncertain whether to spend more on R&D)."
How will tax reform affect academic R&D?
Officials from colleges and universities-in particular those at private institutions that rely on endowments and private contributions-have called it a catastrophe for higher education. The new law eliminates deductions for charitable contributions unless taxpayers itemize their returns, as well as subjecting sizable gifts of stocks or real estate to a minimum tax. It also taxes that portion of student fellowships and scholarships not spent on tuition or course-related expenses. Speser said the added tax burden may discourage students from pursuing advanced degrees.
It's difficult to predict if the change in the law will reduce the amount of money contributed and, through its effect on university budgets, the amount available for R&D expenditures. The new law may increase state support for universities, noted Piekarz, because it is expected to raise state tax revenues. (Taxes are calculated as a percentage of federal taxable income, and the elimination of many deductions will mean higher state taxes unless state legislators lower the tax rates in their states.)
How will the new law affect academic retirement plans?
The law reduces from $30,000 to $9,500 the annual contribution that a person can make to a 403(b) tax-deferred annuity plan. Although most universities and institutions offer such a plan, the average faculty member currently contributes much less than that amount each year. The law also imposes a penalty of 10 percent on most withdrawals made before retirement to restrict use of the plan for other purposes.
Are there any changes that specifically affect R&D?
There are three major portions of the tax code that relate to R&D. One was unchanged, one was made slightly more restrictive, and the third was altered significantly.
- Deductions for research expenses allow companies to deduct from their taxable income that share of R&D costs relating to personnel and materials. This provision was not changed. Congress has estimated its preservation will save industry $3.7 billion this year.
- The R&D tax credit, enacted in 1981, allows firms to claim a credit of 25 percent for additional expenditures on R&D-related personnel and materials (compared with their average expenditures during the past three years). The new law ex tends the provision, which expired at the end of 1985, through 1988, but lowers it to 20 percent. The new law excludes from the credit any spending to "customize" existing products and permits only those expenditures for innovative or substantially-altered products. It also requires companies to take the write-off only in the year the money was actually spent. The changes are expected to save industry $1.2 billion this year.
- The limited R&D partnership, a tax shelter that allows individual investors to invest in a company's R&D efforts, can no longer be written off against regular income, but only from passive income such as interest or investments. This a! lows companies to perform R&D with outside funds; royalties to the investor are taxed as capital gains rather than as regular income.
"Some people believe this change will force people out of the business," explained Lansing
Felker, of the Office of Productivity, Technology and Innovation at the Department of Commerce. "Others say the damage to traditional tax shelters from the bill will make this a more attractive investment (despite the new restrictions)."
What other provisions are contained in the new law?
There is a new, 20 percent tax credit, effective Jan. 1, 1987, for corporations who make contributions to, or enter into agreements with, universities and non-profit organizations. The three-year provision may encourage such activity, Piekarz said, although it's unclear whether it will lead to new spending or divert what is already being spent in-house to outside.
A second provision expands the present charitable deduction for corporations that donate new equipment to colleges for research in the physical or biological sciences. The change makes eligible non-profit organizations that are engaged primarily in research that qualifies as charitable. The provision is used mostly by computer manufacturers as a marketing tool.
The new law also extends through 1990 a 50 percent tax credit for clinical tests by companies that manufacture orphan drugs (drugs that treat relatively rare diseases and, thus, often must be manufactured at a loss).
So what's the bottom line?
It will take most companies and universities several months to understand how the new law affects them and, thus, to decide how much to spend on R&D. And even then the picture may remain cloudy. Noted Piekarz, "They're already talking about changing the tax laws in a few years, to fine-tune what has just been passed. That generates more uncertainty, and uncertainty breeds caution."
Don Veraska is a business writer in Washington, D.C.