Science Grants

With Tax Credits Author: Dudley G. Moon and John W. Fenton II For American science, it is "the best of times and the worst of times." Progress in many fields, particularly biomedical research, borders on the fantastic. At the same time, science education is described in the media as being in shambles, the physical infrastructure of science is crumbling, and the morale of many scientists is at an all-time low. Why is this happening? The stock answer to this question is that there are insufficient governmental funds to support science. Although adequate funding is essential, we believe that the assumption that all of our problems stem from too little government or federal funding is flawed. We believe that the root cause of our current problems is the lack of true economic growth in both American scientific research and industrial productivity and that both must be revitalized. Following World War II, an increasing proportion of basic scientific research was funded by the public sector, especially in areas such as biomedical research. Large federal agencies with seemingly inexhaustible budgets-such as the National Institutes of Health, the National Science Foundation, the Department of Energy (DOE), and the Armed Services-became the major source of funds for much of American basic science. Although charitable and industrial grants supported some investigators, their contribution to the total funding of science was relatively minor. With the passage of time, the majority of scientists and research institutions (including many universities) became dependent upon the federal supply of research funds. Although federal funds are and should remain an important source of scientific funding, it is now clear that budgets are limited and that federal funds will not be available in an ever-increasing supply to support the growth of a vital and dynamic American science. Setting aside all arguments as to who is responsible for this state of affairs, this is the situation we in basic science face at present. During the postwar period, private industry also put an increasing amount of money into its own research and experimentation (R&E). This investment paid off in the years immediately following World War II to the early 1960s, as evidenced by the technological wonders that became available to the American consumer. At the same time (1948-1965), national industrial productivity (output per hour of labor) grew at 3.3 percent per annum (M.N. Baily, A.K. Chakrabarti, Innovation and the Productivity Crisis, Washington, D.C., Brookings Institution, 1988). However, R&E expenditures being a capital investment and thus, long-term, have declined since the early 1960s as companies have been pressured to maintain a high annual, if not quarterly, profitability. In fact, most companies are now concerned with product research and development (R&D) rather than R&E. Paralleling this decrease in R&E investment has been a decline in American productivity to 1.4 percent per annum. The concern over the decline in American industrial productivity became so acute by the late 1980s that economists from the Washington, D.C.-based Brookings Institution were describing the situation as a "productivity crisis" (M.N. Baily, R.Z. Lawrence, "Tax Incentives for R&D: What do the Data Tell Us?", 1992). Clearly, there are multiple factors affecting productivity, but it is our position that long-term economic growth is linked with advances in science and basic experimental research. One approach to fostering an increase in innovative R&E by the private sector has been through the use of a special R&E tax credit. In 1981, a 25 percent tax credit was enacted to be used by companies for R&E endeavors. This tax law allowed companies a tax credit for expenditures incurred in new R&E efforts over and above general business deductions. In 1986, the 25 percent credit was revised downward to 20 percent. However, because of other conditions within the 1986 tax code, only part of the 20 percent credit could be realized. In 1989, some of these restrictions were lifted and the credit re-enacted. In 1991 and 1993, the tax credit for R&E was extended. It officially expired on June 30, 1995, but many expect it to be retroactively renewed by Congress. The transient nature of the R&E tax credit has resulted in significant confusion among its potential users. Despite these limitations, economists such as Martin Neil Baily, formerly of the Brookings Institution and now a member of the President's Council of Economic Advisers, have estimated that between $18 billion and $50 billion would be invested in R&E if the current tax credit were made permanent and more "user-friendly." Such an infusion of capital into R&E would have a tremendously positive impact on American science. We would like to suggest a direct and simple solution to the current problems in both the funding of science and industrial R&E. We propose formalizing the scientific partnership between the American public sector (especially academic institutions) and private sector by giving 100 percent to 200 percent tax credits to any company that provides grants to public-sector scientists for scientific and technological research (R&E) specific to the interests of the company. This would constitute support for a directed type of research. We further propose that these tax credits be enacted for a minimum of 10 years to enable an adequate assessment of their impact on the American economy. What makes this plan unique is that, in addition to the tax credit, a company can use this mechanism to accomplish important research goals. Small start-up companies or those on a tight growth budget could use this tax credit to fund their entire research department with the added benefit that the work could be done by the most expert scientist(s) in the field. Such a partnership would lead to enhanced productivity for both the company and the funded laboratory. A tighter connection between basic scientific research and technological advance is a much-touted goal these days; this plan would achieve it. Further benefits to the granting company include rapid start-up on a project with more rapid turn-around time, limited and defined overhead (especially useful in the area of personnel), and an ongoing objective assessment of the research from "outside" expertise, such as through peer review and publication. Benefits to the scientists involved would include adequate funding to perform good research, the opportunity to be involved in diverse aspects of a problem (such as design of manufacturing facilities), and the personal satisfaction of making a concrete contribution to society. Advantages to the host research institution would include funding of its faculty or staff so that they could participate in the generation of new knowledge, some basic overhead support for its research program (for example, 20 percent of the direct costs), and a partnership atmosphere with industry, leading to enhanced opportunity for endowment gifts and student employment. All parties would prosper from patents, licensing fees, and royalties derived from the research, depending upon the type of grant. Because different granting companies and recipient institutions will have different needs, we recommend three types of grants. Type I-Grants With Shared Rights: This type of grant would distribute the patent and invention rights as well as profits shared in the following proportion: 50 percent to the granting company/individual, 25 percent to the recipient scientist(s), and 25 percent to the host research institution. The grant would be made for not less than four years and would be limited to $500,000 per year. The granting company would have the right to delay publication of findings for a reasonable time until patents could be filed. Early termination of the grant (in less than four years) by the funding company/ individual would incur substantial financial penalty payable to the host research institution and the investigating scientist. Such a grant would merit a 100 percent tax credit for the granting company. Type II-Grants With No Shared Rights: This type of grant would specify that the patent and invention rights as well as profits be divided solely and equally between the investigating scientist(s) and the host research institution. The granting company/individual would give up all claim to patent and invention rights. The grant would be made for not less than two years and would be limited to $250,000 per year. The granting company would not have the right to delay publication of findings. Early termination of the grant (in less than two years) by the funding company/individual would incur substantial financial penalty payable in equal part to the investigating scientist(s) and the host research institution. Such a grant would merit a 200 percent tax credit for the granting company. Thus, the main advantage to a company of this type of grant would be to stimulate research in an area of interest to the company while receiving a tax credit for twice its investment. A company could also use this type of grant to assess the likelihood of patentable discoveries in an area of research. Type III-Miscellaneous Grants With No Shared Rights: This type of grant would be for one year, would be limited to $50,000, and would merit a 200 percent tax credit. Type III grants could be used to focus on short-term, high-risk projects, with much the same advantages to the company as Type II grants. Inherent in the plan is our philosophy that creativity and discovery must be engendered. Also inherent is the view that companies and individuals will usually do what they perceive to be in their own best interests. Therefore, we propose that while there must be regulations to control this program, each regulation should be required to meet the criteria of common sense. Most academic institutions are already receiving some federal dollars; therefore, these institutions are already meeting all federal guidelines. We strongly recommend that the funds from this plan not be allowed to go to a few "super" laboratories. Such an outcome would significantly limit the benefits of the proposed plan. It should be remembered that this plan is not designed to replace the current federal funding agencies but rather to augment them and create alternatives. An important question is how the tax credit program should be administered. We are loath to suggest establishment of yet another government entity. However, none of the existing agencies (NIH, NSF, and so forth) are able to cover all the major scientific disciplines. In addition, most of these agencies are so overworked that they have neither the staff nor the budget for this program. Therefore, we recommend formation of a national Scientific Partnership Commission by the either the administration or Congress to coordinate the program. The main functions of this Scientific Partnership Commission would be to connect companies and industry with scientists and institutions interested in partnerships or projects and to verify for the Internal Revenue Service (IRS) the validity of the participating parties. One of the most important functions of the Scientific Partnership Commission would be to connect interested companies with scientists having the appropriate expertise or project. National databases that have been collected by agencies such as NIH, NSF, and DOE should prove invaluable in this effort. We envision that a company could search the commission's database on a fee-for-service basis, thus deferring some of the cost of the commission's operation. The second major function, that of coordination of the program with the IRS, should be straightforward. The involved companies would make a clear point of their participation in the program, while the host institutions and participating scientists would act as cross-checks on any submitted financial data. The economic well-being of the United States is inextricably tied to advances in research and technology. If a revitalization of the economy is truly a desired outcome of the present administration and Congress, then new monies must be infused into R&E. In this proposed plan, those monies would come from private-sector investment into basic scientific research. Tax credits for R&E are a proven mechanism to stimulate such investment. Legislation enacting the proposed tax credits should be passed as quickly as possible so that American science can get on with what it does best-inventing the future. Dudley G. Moon, left, is a professor of biological sciences at the Albany (N.Y.) College of Pharmacy. John W. Fenton II is a senior scientist with the New York State Department of Health in Albany, N.Y.

Science Grants

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