GOP's False R&ampD Promises

Surprise! Republicans appear unable to deliver on their pledge to cut budgets while increasing largesse to high tech

Republicans won't succeed in offsetting their cuts to the nation's science budget with various industry-boosting tax cuts, deregulation and lawsuit-curbs, say industry officials, policy experts and Democrat critics. Political promises, of course, often go unfulfilled. But these promises were deemed critical to Republican industrial policy, and they received hearty endorsement from the high-tech industry.

Republican leaders, such as Rep. Robert Walker, R-Pa., chairman of the House Committee on Science, promised the offsets as they cut the government's seven-year spending plan for science. But "the [tax credit] idea is not really fleshed out in legislation for now.... There is really nothing in legislative form," said Melissa Sabatine, press secretary for the committee.

"Industry couldn't possibly increase its [research and development] support to eliminate the gap" caused by Republican spending cuts, even if the industry-boosting offsets are enacted, said Chuck Larson, executive director of the Washington-based Industrial Research Institute, an association of major research-intensive companies. "Walker is naive if he believes industry will take up the support," ensuring that foreign competitors will win a long-term technological and economic advantage over the United States, Larson said.

"I don't think there's any chance that the kind of tax and other changes [envisioned by Republicans] will negate the impact of the cuts," said Larry Schimerine, chief economist at the Washington-based Economic Strategy Institute, which favors government support for industry.

Some valuable offsets -- such as the now-dead R&D tax-credit -- might be approved late in the year, said Peter Hanley of the Institute for the Future, based in Menlo Park, Calif. But overall, Congress is not doing enough to help the nation's R&D spending, he said, because "there's been obstruction on both sides." For example, the Republicans have cut spending, while the Democrats have stalled capital-gains cuts and opposed the R&D tax credit, he said.

A budget study prepared by the Washington-based American Association for the Advancement of Science predicts a 33 percent cut in government science spending over the next seven years, ensuring "great harm to the American effort in science, engineering and education," said the association. Civil programs under the jurisdiction of the House Committee on Science appear set to shrink $27.2 billion to $20.6 billion over the next seven years. Total government research spending was $71 billion in 1995. This includes $33.2 billion in Pentagon programs and $12.4 billion in university research grants. Among the science and research programs to be killed by the Republican budget cuts are the Environmental Technology Initiative and the Commerce Department's Advanced Technology Program. The elimination of these technology development programs allows Congress to avoid significant cuts to long-term research, also called basic science, said Walker.

Rep. George Brown, D-Calif., the former head of the science committee disagreed, saying that after 2000 the cuts will wreck the nation's worldwide technological leadership. "We will face a new crisis" after 2000 because of the cuts, he said.

But Walker and other Republicans say that industry will take up where the government has left off. The Washington-based Industrial Research Institute pegs industry's research spending at $127 billion, which includes $25.5 billion in government contracts. "There's little if any real [after-inflation] growth," said Larson. However, companies are trying to make their R&D more efficient, and are cooperating more with universities and government research centers, he said.

R&D spending nationwide has declined from 3 percent of gross domestic product to 2.6 percent, significantly below the 3 percent level held by Germany and Japan, according to a study prepared by the Institute for the Future.

According to a survey of 900 top companies by Business Week, their research amounted to $84.7 billion in 1994, up 4 percent from 1993 spending of $83 billion. The 1994 figure includes $7 billion spent by General Motors, $3.4 billion spent by IBM Corp, $2 billion spent by Hewlett-Packard and $1.8 billion spent by Motorola. In the case of TRW Inc., based in Cleveland, Ohio, most research is driven by customers' needs, such as a new auto part, said spokesman Mike Jablonski. Any government efforts to spur research by deregulation and tax cuts "probably won't make any difference," to TRW's research plans, he said. Of industry's research money, 70 percent goes to product development, 22 percent goes to applied research and only 8 percent goes to basic or long-term research, according to an Industrial Research Institute study.

Among the Republican-backed proposals to offset budget cuts:

  • R&D tax credit -- According to supporters, an R&D tax credit will boost commercial R&D in the short term by $1 for every dollar cut from taxes. With a tax credit expected to cost $7 billion over five years, the measure would greatly benefit companies in the infotech sector, say proponents. The R&D tax credit ended June 30, and Congress has strong interest in reviving it, at least for the next year or two, said a House staff member. But tax incentives mean little to start-up companies, which lack investment capital, said Brian Williams, a senior vice president at Optex Communications Corp., Rockville, Md.- Capital gains -- Congress is considering several proposals to slash capital-gains taxes, which proponents say will help provide investment capital for high-risk start-up companies. For every dollar the government gives up in capital-gains taxes, the cost of investment capital will decline by roughly 6 cents, according to the Washington-based American Electronics Association. The House voted to roll back capital-gains taxes by $32 billion over the next five years, but other priorities, such as per-child tax credits and deficit reduction, will sharply cut into the capital-gains rollback, said the House staff member. And "the evidence pretty clearly shows that the kind of capital gains tax cuts they are planning... doesn't affect long-term savings and investment," which underwrite science and research efforts, said Schimerine. - Science reorganization -- Combining the government's non-military research efforts under a new science department would divert several billion dollars from bureaucracy to science spending, says Walker. However, Walker's proposal has been rejected by other Republicans, as well as by officials in the White House, sharply limiting its prospects for success.

  • Space research tax credit -- "I've had very good communications with the [tax-writing] Ways And Means [committee about] introducing some tax incentives," said Walker. However, "that must fight for the same pool of [tax credit] money as everything else," said the staff member.

  • Deregulation -- Government regulations cut into company revenues, hinder risk taking and hurt cutting-edge research, say critics. But their impact on research is limited, said Schimerine. Also, the Senate has failed to pass even a watered-down version of the deregulation bill passed by the House. The prospects for a deregulation bill this year appear dim.

  • Legal reform -- This measure appears set for final passage, pleasing many infotech firms, which say they are unfairly sued for damages when their share prices decline. If implemented, these reforms will tilt science spending toward short-term, corporate priorities, said Erich Bloch, who was director of the National Science Foundation under Presidents Reagan and Bush. The wiser course would be to take the budget cuts from Pentagon and Energy Department accounts, he said. "If we are not careful, [the budget cuts] will destroy the science and technology infrastructure of the country," said Bloch, who is now with the Washington-based Council on Competitiveness.

But strong lobbying by some research industry groups has preserved their funding, said Al Teich, director of the science and policy program at the Washington-based American Association for the Advancement of Science. For example, the health industry has helped convince Congress to increase spending for the National Institutes of Health, and supporters of the U.S. geological survey protected their programs from cuts, he said. Most pro-science groups have been slow to lobby against the cuts, he said.

In the long run, the Republicans' impact on R&D spending will be first measured by the number of new U.S. patents, and whether U.S. scientists work overseas, and then by the economic leadership of U.S. universities and companies, he said.

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