Tax Break for Computer Security

The infotech industry may gain billions from government efforts to promote anti-hacker defenses

The U.S. government could give companies a tax break worth billions of dollars to help accelerate their purchase of better anti-hacker technology, said Jamie Gorelick, the deputy attorney general.

Improved anti-hacker technology is needed to protect the nation from wartime hacker attacks, which could damage the telephone network and power grid, Gorelick said Sept. 20 at a Washington conference hosted by the American Bar Association.

By changing tax rules to help companies write off investments in computer technology, the government could accelerate computer and software purchases inside corporations, she said.

"We have to build on industry's own cycle of replacing its technology.... There's not enough money in the government's coffers to erect walls around our domestic infrastructure," she said.

Gorelick acknowledged that such tax changes could be worth billions of dollars to the nation's hardware and software industries.

Gorelick's offer is a carrot for skeptical industry executives who have been reluctant to join Gorelick's network-defense discussions, said an industry observer. But if the carrot doesn't help solve the problem, Gorelick may later produce a stick, such as a revision of liability laws that would expose business to expensive lawsuits whenever they fail to protect data about transactions, employees, patients or customers, he said.

The software industry is likely to gain the most from Gorelick's plan because much of the latest security technology is software. The software industry's revenues reached $74 billion in 1994 and are growing at roughly 10 percent per year, according to a study sponsored by the Business Software Alliance, based in Washington.

Current tax regulations allow companies to deduct their annual spending on mass-market software from their taxes over the next three years.

Even if companies were allowed to immediately deduct computer spending from their taxable revenue, the likely benefit is difficult to estimate, said Mark Nebergall, a tax expert at the Software Publishers Association. However, a straightforward 10 percent tax credit for the purchase of anti-hacker technology "would really get the market going," Nebergall said.

"There is no magic button... but there will be some impact" on companies' purchase of information technology, predicted Mark Bloomfield, an economist at the industry-sponsored American Council for Capital Formation.

Gorelick's offer "would clearly drive some additional buying," but would be overshadowed by companies' other priorities, such as whether it wished to declare its profits over several years or demonstrate a large profit in one year, said Joseph Heintz, chief financial officer at KPMG Peat Marwick, an international accounting firm based in Montvale, N.J.

Changing the depreciation schedules for infotech investments would be fantastic, said Mike Maibach, a Washington lobbyist for Intel Corp., Santa Clara, Calif., which would cut its own tax bill to Washington and increase sales to companies buying new computers.

Gorelick's suggestion could help boost anti-hacker defenses, but would have to be paid by politically difficult cuts to the government's budget, said Ken Salaets, director of government relations for the Information Technology Industry Council, an industry-backed lobbying group based in Washington.

Gorelick's suggestion is part of an emerging effort by the Clinton administration to bolster the nation's defense against hostile computer hackers sponsored by countries such as Iraq or Iran.

In July, Gorelick announced that President Bill Clinton has created a commission on Infrastructure Protection, charged with developing a plan for defending the nation's critical networks from computer attacks. The commission is expected to issue its recommendations in late 1997.

"I consider this issue to be one of the most important issues that our government, and our society as a whole, face today.... What we need, then, is the equivalent of the Manhattan Project for [network] infrastructure protection," she said at a July 16 hearing called by Sen. Sam Nunn, D-Ga.

The commission will be chaired by retired Air Force Gen. Robert Marsh, and is dominated by senior officials from the departments of Justice, Commerce, Defense and the Treasury. Government officials are adding at least 10 outside representatives to the Arlington, Va.-based panel, including industry executives and state officials.

The industry representatives are needed, say government officials, because government officials need their cooperation to bolster anti-hacker defenses. Among the companies that may be invited to join the commission are IBM Corp. and AT&T Corp.

"We have just begun our effort to reach out," said Gorelick. But "we have a lot to overcome. We don't always get the reception [from industry executives] we would like," she said.

Aside from changing the depreciation rules, Gorelick declined to suggest other policies the government might use to boost industry's interest in improving anti-hacker security.

Industry executives' attitude toward the commission range from dismissive to cautious. Despite the commission's apparent priority, executives have been reluctant to get involved, partly because they believe the commission may be a Trojan horse that will increase government regulation of the infotech industry.

Executives have long opposed government regulation of the infotech business, sometimes prompting government officials to buy industry's cooperation. In 1994, the government won support from the telephone industry for a wiretap plan only after promising to pay implementation costs of at least $500 million over five years. Even then, the Washington-based Cellular Telephone Industry Association moved in mid-September to block portions of the plan.

Another reason for industry's cautious attitude is a concern that the commission may fail to produce anything of substance, said one industry executive. For example, the November election may cause a major reshuffling of top government officials, perhaps downgrading the commission's status, he said.

Also, executives are already buying new anti-hacker technology to protect the fast-growing business of online commerce, and are pressing Congress and the White House to roll back existing government regulation of the industry. Among their targets are government controls on encryption and tax regulations for exports.

The dispute over encryption is prominent, partly because industry officials say that the best way for the government to promote information security is to relax controls on the export of encryption products.

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