Alex Philippidis Senior News Editor Genetic Engineering & Biotechnology News
Democrats will likely try to advance bill as part of focus on jobs but may have to wait until next November.
With President Barack Obama and Congress professing seriousness about ending the era of annual trillion-dollar deficits and deflating the national debt once and for all, it wouldn’t appear to be the right time to seek additional tax breaks from Washington. That’s not the thinking, though, of the biotechnology and pharmaceutical sector including companies, academic institutions, and industry groups in four states.
The Life Sciences Coalition joined with some members of Congress in trying to squeeze out some additional incentives for the industry, with the promise that the breaks will allow it to grow faster in the U.S. and better compete with other nations around the world for life science companies and their jobs.
- The Life Sciences Jobs and Investment Act of 2011 (S. 1410 and HR 2632) lets businesses choose from a pair of tax breaks. One is a 40% credit toward the first $150 million of R&D, double the current 20%. The other option lets businesses repatriate to the U.S. up to $150 million a year of profits from overseas operations at a 5.25% tax rate compared with the current repatriation tax rate of 35%, provided those funds are used in the U.S. solely to:hire additional scientists, researchers, and comparable personnel engaged in life science research;
- invest in life science research at U.S. universities, U.S. post-graduate institutions, not-for-profit research consortia and research incubators, as well as comparable U.S. scientific organizations; and
- invest in new laboratory and related life science research facilities.
“The five-year period presents an opportunity for companies to bring back $750 million. It’s a much longer term than the repatriation [one-year tax-rate reduction or “holiday”] in ’04 or the current proposals for repatriation, which are one-year proposals,” David Jory, a spokesman for the Life Sciences Investment Act Coalition, told GEN.
As a result, he said, the bill should succeed where the 2004 repatriation holiday failed, namely in persuading global life sci companies to return money invested overseas back to the U.S. and keep it here.
Details of the Measure
A report released May 27 by the Congressional Research Service, which provides policy and legal analysis to members of Congress and its committees, illustrates the problem: After Congress approved and then-President George W. Bush enacted the American Jobs Creation Act in 2004, 843 of roughly 9,700 eligible corporations took advantage of a tax deduction created by the measure for repatriating overseas earnings in the U.S. Those 843 companies repatriated $312 billion in qualified earnings and created total deductions of $265 billion.
The report highlighted the bill’s effects on a dozen corporations, two of them pharma giants:
- Pfizer repatriated $37 billion in earnings in 2004, only to cut 10,000 jobs and accumulate $60 billion in foreign earnings once the one-year holiday expired.
- Merck & Co. returned $15.9 billion in overseas earnings stateside, then cut 7,000 jobs and racked up $17 billion in foreign earnings afterward.
Jory said companies will have to keep the funds they repatriate in a special account, trust, or other arrangement that separates them from other corporate funds until disbursed for activities allowed under the law. CEOs and the chairs of public-company audit committees will have to sign off that they are in compliance with the legislation and indeed repatriated overseas revenue in the U.S. or risk perjury charges.
And those executives won’t be able to classify their compliance with the law as an “uncertain” tax position, as public companies and other companies that issue certified financial statements under Generally Accepted Accounting Principles (GAAP) rules can do under FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48).
Those stipulations won’t effectively enforce the measure, according to a group critical of the bill. “Any kind of restriction you attach to a repatriation holiday can’t really work because a) money is fungible, and b) Congress tried to do this before, but it didn’t work,” Steve Wamhoff, legislative director of Citizens for Tax Justice, told GEN. Citizens for Tax Justice is a 501 (c)(4) public interest research and advocacy organization focused on federal, state, and local tax policy.
Will the Bill Incentivize?
Wamhoff said the bill was unnecessary because Washington should not use tax incentives to reward behavior—R&D activity, in this case—that beneficiary companies are likely to engage in anyhow. The life science coalition counters that current tax rules discourage companies from carrying out research activity in the U.S.
Besides enforcement, another key to returning overseas income to the U.S. will have to look beyond holidays of one or five years, Jory added. “I think there is also a recognition that fundamental tax reform is likely in the next few years and that the goal of the multinational, certainly in the biopharma and tech sectors, is that in order to keep the U.S. competitive, we need to lower our corporate rate and go to a territorial system.
“That is really the cure for the problem of money being stranded overseas,” Jory said. “If you take away the 35% penalty of bringing back the money, there’s no longer an incentive to leave it offshore, except to do a real expansion of operations overseas.”
While labor costs overseas are significantly lower than in the U.S. and will likely stay that way well into the future, Jory said, it’s not the only factor driving biopharmas to stash cash outside American shores. The size of Asian and other overseas markets also beckons U.S. companies.
With far-flung global operations, big biotech and big pharma companies are expected to embrace the repatriation holiday, while U.S. startups are likely to flock to the doubled research tax credit. While businesses of all sizes are eligible for the tax incentives in the bill, smaller companies are expected to benefit from it most, Jory said. That’s because 57% of life sci businesses generate less than $1 million in annual revenue, which is part of the 98% of all life sci businesses that make less than $50 million a year.
Whatever their size, supporters pointed out, the legislation will lead to 683,000 new jobs over the next five years. The figure includes both “direct” positions employers in the industry are expected to create and “indirect” jobs generated outside the industry but attributable to its expansion. That averages out to 136,000 jobs a year.
That forecast is a rather rosy one given the performance of recent years. Between 2001 and 2008, the year of the Wall Street meltdown from which the economy has yet to recover, the bioscience industry added 193,748 jobs, according to reports released last year by the Biotechnology Industry Organization (BIO) and Battelle. On the bright side, the industry’s 15.8% job growth rate was 4.5 times the overall growth rate for the entire U.S. private sector (3.5%).
In addition to speaking for the coalition, Jory is president of the Washington, D.C., government relations firm Capitol Hill Consulting Group, whose lobbying clients in recent years have included two pharma giants, Eli Lilly and Novartis. Neither is among members of the coalition listed on its website, though four biopharma companies are: Celgene, Cephalon, Endo Pharmaceuticals, and Johnson & Johnson. Medical device giant Boston Scientific is a member, as are bio and pharma groups in California, Massachusetts, Pennsylvania, and Texas.
“This policy will assist in directing funds to the thriving network of research institutions, business incubators, and private companies that contribute to the innovation environment in Pennsylvania,” said Christopher P. Molineaux, president of Pennsylvania Bio, the state’s biotech industry group, in a statement.
U.S. Rep. Devin Nunes (R-CA) introduced the life science measure in the House of Representatives and has won co-sponsorship backing from seven colleagues. The eight divide evenly between the two major parties and include Reps. Jason Altmire (D-PA), Charles W. Dent (R-PA), Chaka Fattah (D-PA), Jim Gerlach (R-PA), Patrick Meehan (R-PA), Bill Pascrell Jr. (D-NJ), and Allyson Y. Schwartz (D-PA).
The presence of six Pennsylvania members of Congress isn’t coincidental since biopharma is an increasingly important industry in and around the Keystone State; biotech trade group Pennsylvania Bio and pharma trade group Healthcare Institute of New Jersey are among backers. Pennsylvania is also the home state of the measure’s Senate sponsor, Sen. Robert Casey (D), who unlike Nunes had yet to attract a co-sponsor at deadline.
The Congressional political divide that has stymied many bills that affect the life sciences doesn’t bode well for this legislation either. It’s possible that Congressional Democrats may try to advance this bill as part of the larger focus on jobs that they and President Obama have promised for this fall as his re-election effort prepares for what’s appearing to be a difficult campaign.
More likely, the effort to bring new tax incentives to the biotech industry will have to wait until the dust in Washington settles. And that won’t happen until at least next November, when the presidential election ends.
Alex Philippidis is senior news editor at Genetic Engineering & Biotechnology News.