Monday, February 6, 2012
Floor Speech: A research and development tax credit for innovative small businesses
As delivered on February 6, 2012
Mr. President, last week President Obama unveiled his Startup America Legislative Agenda. It marked the one-year anniversary of his Startup America initiative, an ambitious, impressive, energetic national effort led by, among others, legendary innovator and entrepreneur Steve Case, the founder of AOL.
It was a strategy that focused on how the federal government can best help young companies and, in particular, entrepreneurs, all over this country get into the game of starting and growing businesses.
It’s smart and it’s important. Entrepreneurs are driving our economic recovery and will drive our economic recovery into the future. They are taking the risk personally to turn their ideas into startup companies in fields from biotech and clean energy to manufacturing. Among these innovators could be the next American giant, a General Electric or a DuPont, but in order for these startup companies to grow, we have to support them in their critical early stages.
So Mr. President, today I take that as our challenge.
Whenever I visit a factory in Delaware, or meet with a young owner of a company he’s just started, I ask the same question: how can we best help you to grow?
Small business, it’s often said, is the engine of job creation in this country. In the 1990’s and early 2000’s, small firms created 65 percent of the new jobs in this country. But I want us to particularly focus on those small businesses that have enormous potential, so called “gazelle” startups — those that grow not from five to 10 or five to 20 employees, but from five to 50 to 500 to 5,000.
Whether it’s Facebook or other startups that have gone from literally bench-top or dorm rooms to being employers of thousands or tens of thousands, our economy has grown dramatically because of these rapidly growing innovative startups. Typically, they are startups that focus on a disruptive technology or product, something that fundamentally changes a whole sector of our marketplace. And they have the most promising potential for job creation. Between 1980 and 2005, most of the net new jobs in America were created by firms that were five years old or less – that’s about 40 million jobs over those 25 years.
This summer, I hosted in Delaware a series of roundtables with business owners. The focus of these conversations was on how we can help their businesses grow and grow quickly. A lot of these businesses were young, innovative companies. They have a great idea and a good start on their research, but I often found, particularly in this economy they are struggling to capitalize on their innovations.
Innovation is the spark that drives and sustains entrepreneurship — particularly entrepreneurship in disruptive technologies — but it is research and development that drives that innovation. The government only has so many tools we can use to help promote innovation, and today I want to talk about a piece of the tax code that is one of the most powerful tools in our toolbox.
Thirty years ago, Congress created the Research and Development Tax Credit (or the R&D Tax Credit) to help incentivize companies to invest in innovation — to invest in the people who are doing the research and the development that drives innovation. In fact, 70 percent of R&D qualified expenses today are for wages. So in many ways, it is an innovative jobs credit.
It has helped tens of thousands of companies and has been extremely successful at getting companies to invest in innovation. It has one key weakness – it expires. It expires all too often. It has, in fact, expired eight times and been extended 13 times, and it has most recently expired in December of last year.
The first bill I introduced as a Senator last April was entitled the Job Creation Through Innovation Act, and it did two things. First and most importantly it made the R&D tax credit permanent — important, in my view, to sustain and extend this successful program.
But there’s another issue we still need to address to make the R&D tax credit relevant to these early stage, innovative high-growth companies. Right now, these tax benefits are available only to more established companies that are already turning a profit. You have to have a tax liability on your profits for that credit to be of any value to you.
That’s a roadblock in the way of success for startups and small businesses in Delaware and around the country, and a place where I think we can and should come together across the aisle to address this gap in the R&D tax credit program. It is the small, early startups that most need a cash infusion to support their confidence, their stability and their innovation. We can and should take this tax credit and retool it in a way that makes it more relevant and more effective.
If entrepreneurs are the ones taking risks in this economy and creating jobs, they should be the ones we support in this tough economy through our tax code. As I said before, history shows it’s those young companies that are creating the most jobs the most quickly and that have the best return on tax expenditures.
So here’s what I’ve been working on. As I’ve met with innovative young businesses in Delaware one of the ideas that has come up more than once is to change the R&D tax credit so that it’s accessible not just to big and profitable companies, but by being tradable so that smaller or start-up companies that have no tax liability can take advantage of it. How would that work? Well, it allows startups to sell their tax credit to a larger company, giving them a much-needed infusion of cash.
Let me give you an example. Elcriton is a small but high-promise, high-potential Delaware company. It has patented strains of bacteria that are designed to consume duckweed, also called “pond scum,” and produce bio butanol — a promising drop in alternative fuel. It’s got tremendous potential. Elcriton today is run by two PhDs who have put together all the money they can raise from family and friends and angel investors and early funds into research and development. But for them to grow, and grow quickly, they need access to more capital to fund more innovation.
Or Evozym. Evozym Biologics also is a two-year-old Delaware company trying to bring-to-market cutting-edge innovations in computing and in the development of proteins from the University of Delaware and the Desert Research Institute. They’re doing incredible things there.
Both of these companies need more funding to invest in R&D and to capitalize on their potential to grow rapidly and grow high quality jobs. If they were already bigger, well-established successful companies, they might well qualify for the existing R&D Tax Credit. But because they’re so small and just getting started, our current tax credit doesn’t help them at all.
Fortunately, Delaware is also home to a few great, well-established companies. Since those companies turn a profit and pay taxes, they could actually utilize a tax credit. So in this case, Elcriton or Evozym would sell their innovation credit to one of the larger, established companies. The bigger company gets the tax credit, the newer company gets the infusion of cash it needs to sustain its innovation. It would be a win-win.
This is just one idea of a number I’ve introduced or that I’ve proposed, that I’ve discussed with Senator Baucus and others on Finance, and I hope that in discussing it today, some of my colleagues here, on both sides of the aisle, and leaders in the business and innovation communities will work with me to further refine it, focus it and make it part of our greater conversation about tax reform and the economic recovery.
We can and should put our heads together here to find common-sense solutions to the problems, challenges and opportunities of innovation and competitiveness.
We have to give American business the support they need to compete in an increasingly competitive the global economy because in my view, we are falling behind in the race for innovation. In the 1980s, the United States was routinely ranked as a having the best R&D tax incentives and overall support for innovation in the world, but today, some studies have us ranked 17th in the world in supporting and sustaining innovation.
I refuse to let American companies, American inventors and American workers fall behind. With the right resources, American ingenuity will continue to outcompete any country on earth every time. I know it’s possible. I’ve seen it week in and week out as I’ve visited small and medium start-up companies in Delaware.
Just a few weeks ago, in Bridgeville, Delaware, a town many from here have traveled as they’ve gone to the Delaware beaches, I stopped to visit a small company, Miller Metals, that is proving day in and day out that with investment, with innovation with continuous improvement, they can go head-to-head with Chinese metal fabricators and win. Manufactured in Delaware, competitive in the global marketplace.
Although we really need a full overhaul of our corporate tax structure, making this one small tweak to the R&D tax credit to make it accessible to early stage, innovative companies, will in my view give us a running start into the headwinds of the global economy, and I think we have no more time to waste.
It is small businesses and innovative strategies that will create the jobs we need to put our neighbors back to work and turn this economy around more quickly. Let’s work together, let’s help them and let’s make progress on this most important proposal, to change the R&D tax credit to make it permanent and make it accessible for early stage companies.
I’m eager to hear what people think about this idea, and hope they’ll connect with me and my office and let me know how to improve on it, how to execute on it and how to deliver this as a new tool in the toolkit of American innovation.