Extension of research tax credit and educational assistance exclusion.

On July 30, 1996, Tax Executives Institute filed the following comments with the House- Senate Conferees on H.R. 3448, the Small Business Job Protection Act of 1996. The comments, which recommend the extension of the research tax credit under section 41 and education assistant exclusion under section 127, supplement position papers that the Institute filed earlier in the legislative process. As passed by Congress and signed by the President, the legislation does extend both provisions, though there remains a gap in the research tax credit from July 1, 1995, through June 30, 1996.

As President of Tax Executives Institute (TEI), I am writing to express support for permanent extensions of both the research tax credit and employer provided educational assistance income exclusion. Both provisions are before the Conference in varying forms as part of the Small Business Job Protection Act of 1996 (H.R. 3448). TEI is an international organization of approximately 5,000 professionals who are responsible -- in an executive, administrative, or managerial capacity -- for the tax affairs of the corporations and the other businesses by which they are employed. Our members deal with the Internal Revenue Code on a daily basis, and they are committed to maintaining a tax system that works -- for the benefit of both taxpayers and the government alike.

Both the employer-provided educational assistance exclusion and the research credit represent important investments in America's future. Accordingly, both have enjoyed widespread support for many years. The longstanding support for these provisions is evidenced by their frequent and -- regrettably -- often retroactive extension. Indeed, since its enactment in 1978, the section 127 exclusion for educational assistance has been reinstated retroactively no fewer than six times. Similarly, the section 41 research credit provision has been extended numerous times (once retroactively).

TEI believes that the incentive effect that these provisions are intended to provide would be enhanced by restoring them on a permanent rather than a merely temporary basis. Indeed, the "sunsetting" of these provisions diminishes their vitality. Repeated short-term reenactments of the research credit cannot help but engender uncertainty and impede the credit's incentive effect of encouraging companies to engage in incremental research projects in the United States. Moreover, the Senate version of the Small Business Job Protection Act would leave an interim gap of twelve months between the expiration of the research credit and its reinstatement. This gap could undermine the effectiveness of the incentive because of concern for the instability of the credit incentive. (Previous expirations of the credit and its subsequent reenactment -- especially where retroactive -- may have raised taxpayer expectations that the credit will be available to reduce the cost of their projects.) To improve the bill, the Conferees should restore the seamless continuity and availability of the research credit incentive by making it retroactive to the previous expiration.

The on-again, off-again nature of both provisions also imposes substantial administrative burdens on taxpayers. For example, with respect to employer-provided educational assistance, employers have been required to design and implement programs to tax and withhold the value of such assistance, only to modify (or undo completely) those programs after-the-fact. Employees too have been subject to confusion, financial hardship, and the administrative burden of filing amended returns from the see-sawing effect of extensions and retroactive legislation.

By restoring the educational assistance exclusion of section 127 and making it permanent, the administrative burden on employers and the financial burdens on employees will be ameliorated. As important, educational assistance programs provide job opportunities and advancement for lower-paid and unskilled workers. In addition a permanent extension of the employee income exclusion will encourage more employers to establish such programs to enhance the knowledge and training of their workforces and otherwise hone employee skills that are required in a highly competitive global market.

TEI appreciates the opportunity to present its views on this important subject. If you should have any questions, please do not hesitate to call Timothy J. McCormally, TEI's General Counsel and Director of Tax Affairs, at [phone].