Hulten noted that a lot of new pharmaceutical drugs emerge as a result of intensive R&D over a long period of time by small biotech companies. However, in the later phases of the development, these companies tend to want to partner with a larger pharmaceutical firm, in part, to help with the approval process by the Food and Drug Administration and also to use the marketing muscle and sales expertise of these companies. Typically, when drugs become successful, they do not suddenly jump to a huge market share. Their success is more often the result of serious effort, and so these calculations get factored in at an earlier stage in the innovation. He cautioned against the too-easy assumption that all such expenditures should be considered transitory.
During open discussion, Senator Bingaman was asked his view about the pace and the outlook for improved financial accounting in terms of disclosure and transparency, given that it is from the business sector that the statistical agencies would ultimately look to for source data. He responded that the likelihood of any action depends on whether a strong justification can be produced for requiring changes in accounting in the area of intangibles. If, he said, there is a real purpose served by it, then support can be generated for making those kinds of changes. To the extent that it is solely an academic inquiry that does not have clear policy implications, either for the company or for investors or for public policy issues, then it is more difficult.
Another participant asked whether the senator, as a member of the finance committee, could assess the outlook for the creation of tax incentives for intangibles. He noted that various members of Congress had been dealing with the R&D tax credit for a long time, but that no one could seem to make progress on an investment or knowledge tax credit for worker training, although the idea has been around for at least a decade and a half. He was also asked whether there was any hope of making some of these things, like the R&D tax credit, permanent.
Bingaman replied that the only way to make the R&D tax credit permanent would be as part of a larger reform effort. Whether the new administration will ever have this as a top priority was unknown at the time of the workshop. He added that there is a tendency to think that it will happen, but the reality is that the current deficit situation is such that the nation has to find a way to generate more revenue; rather than just raising taxes, politicians typically like to do that as part of a tax reform package. He expressed the view that the chances of a substantial tax reform might be reasonably good in the next Congress, and maybe some of these things could be done as part of that.
He noted that the reason many tax credits are temporary in the first place is because of the Budget Act of 1974, which, by putting limits on the size of the deficit that can be run each year, causes Congress to pass short-term tax extensions instead of making them permanent. The Joint Tax Committee takes the position that the effect on cost projections of making them permanent is substantial, and no one wants to have to factor that in. The president does not want to factor it into the budget he sends to Congress, and Congress does not want to factor it into the budget it passes.