Now that U.S. lawmakers have had a few weeks of reality away from the Beltway, it’s time for them to get back to work.
First up on the congressional agenda are raising the national debt ceiling and agreeing on a discretionary spending plan to keep the government open once the new fiscal year starts Oct. 1. Next in line is a chance at legacy building by reforming the 31-year-old U.S. tax code, which President Donald Trump has described as self-destructive and a crushing burden on the economy.
“I’m calling on all members of Congress . . . to support pro-American tax reform. They have to do it. It’s time,” Trump said last week as he unveiled his tax reform agenda at a rally in Missouri.
Cries for tax reform aren’t new on Capitol Hill. Lawmakers on both sides of the aisle have been talking up the need for comprehensive tax changes for several years. “Our tax code just makes it hard to be an American company, and it puts our workers at a disadvantage,” Sen. Rob Portman (R-Ohio) said more than two years ago at a hearing held by the Senate Permanent Subcommittee on Investigations. (See BioWorld Today, July 31, 2015.)
At that hearing, Claire McCaskill (D-Mo.) agreed that the tax code needed fixing, but she said it would be a hard job “exacerbated by the fact that we all don’t see things the same way around here.” She also noted that reforming the tax structure is a frightening prospect, given that every action will have a reaction.
Now, Trump is making tax reform the foundation of the economic plan he’s promoting as the “American Model.” He presented a reform scaffold of four overriding principles at last week’s rally, but he apparently is leaving it up to Congress to flesh out an actual tax code for the 21st century.
During the fleshing-out process, the biopharma and med-tech industries will be pushing some of their own ideas from wish lists that have been growing over the years. Some of their suggestions align with the president’s framework; others might run contrary to it.
Trump’s first principle is simplification. “We need a tax code that is simple, fair and easy to understand. That means getting rid of the loopholes and complexity,” Trump said.
He noted that when the tax code was last revised under President Ronald Reagan, Congress “eliminated dozens of loopholes and special interest tax breaks, reduced the number of tax brackets from 15 to two, and lowered tax rates for both individuals and businesses.”
But over the past few decades, loopholes have crept back into the system, tax rates have increased and the tax code now spans more than 2,600 pages, the president said.
Of course, a loophole is in the eye of the beholder. Whereas some critics might categorize corporate tax credits and incentives as loopholes, both the Biotechnology Innovation Organization (BIO) and Advamed see certain tax credits and business incentives as essential for life sciences companies.
“For the United States to continue to lead the world in the 21st century innovation economy, tax reform must support the growth of small business innovators, incentivize investment in breakthrough technologies and bolster U.S. companies currently hamstrung by a high corporate tax rate and a burdensome worldwide tax system out of step with the rest of the world,” BIO said in a recent letter to Sen. Orrin Hatch (R-Utah), chairman of the Senate Finance Committee.
The president’s second requirement addresses some of BIO’s concerns by calling for a competitive tax code that cuts the corporate tax rate. When the business rate was reduced to 35 percent under Reagan, it was one of the lowest in the world. Thirty years later, it’s one of the highest, as the average business tax rate among developed nations is less than 24 percent. As a result, “foreign companies have more than a 60 percent tax advantage over American companies,” Trump said.
While a number of credits and deductions can lower that tax burden, the average effective rate paid by U.S.-based companies is seven points higher than the average effective rate for other countries in the Organization for Economic Co-operation and Development (OECD). That imbalance can make a profitable American company a target for a hostile foreign takeover, as the uneven tax rates would make it worth at least 16 percent more to a foreign bidder than it is to a U.S. firm.
Ideally, Trump would like to see a 15 percent U.S. corporate tax rate, but some experts have advised setting it at the OECD average to avoid triggering a global “pricing war” on tax rates.
Trump’s other two planks are tax relief for middle-class families and repatriation of the trillions of dollars U.S. companies have made overseas. Unlike other developed countries, the U.S. taxes earnings made anywhere in the world – once the money is brought home. This worldwide system encourages U.S. companies to re-invest their earnings in countries that offer a lower tax rate rather than invest them at home where they would face much higher taxes. Repatriation would enable companies to bring the money to the U.S. at a lower tax rate.
Repatriation isn’t enough, according to BIO. “It is vital that Congress take steps to move America to a competitive territorial tax system . . . consistent with those in so many other OECD countries. Freeing up over $2 trillion that [is] currently trapped overseas due to the inefficiencies of the tax code will boost economic growth and capital investment,” the trade group told Hatch.
While BIO agrees that the corporate tax rate must be reduced, it still sees the need for tax credits and incentives. “By itself, a lower corporate tax rate will not support growth and innovation in America’s small businesses, many of which are pre-revenue,” BIO said. “Comprehensive tax reform should go further than ‘broadening the base and lowering the rate.’ Instead, policymakers should specifically promote innovative research-intensive businesses through incentives for other companies, individuals and funds to invest in small companies and support their research.”
BIO also recommended that the R&D and orphan drug tax credits be maintained in a revised tax code. “The U.S. has fallen behind in its R&D generosity, falling from a leader among OECD countries in the late 1980s to 25th for large companies and 26th for small businesses in 2016,” the group said. It is encouraging Congress to strengthen the R&D tax credit by increasing the alternative simplified credit rate and continuing to allow innovators that have yet to make a profit to take a portion of the R&D credit against their payroll tax obligation.
The orphan drug tax credit provides a 50 percent credit on expenditures incurred in clinical trials that test drugs in rare diseases. Given the failure rate in clinical trials, the cost of the trials and the medical need, “the intent of the act is to get companies to start something,” Charles Fritts, BIO’s senior director of federal government relations, told BioWorld.
Advamed’s tax reforms
On the med-tech side, Advamed agrees with many of BIO’s recommendations, but topping its list of reforms is the elimination of the $30 billion medical device tax that was created to help pay for the Affordable Care Act. While elimination of the tax has garnered bipartisan support in Congress, it remains a thorn in med-tech’s side.
As for other measures, “the goal of tax reform should be to support job creation, economic growth and competitiveness,” Advamed said. Among its suggestions are:
• provide a level playing field for medical device companies competing in world markets;
• provide tax incentives comparable with or better than those of major competitor nations;
• spur availability of capital for small and startup companies;
• limit passive activity loss rules to incentivize investors to finance companies at earlier stages of development;
• reform the use of net operating losses generated by R&D to encourage outside investment in smaller firms;
• change the qualified small business definition to include companies with gross assets of up to $150 million instead of the current $50 million;
• permanently extend the current depreciation expense deduction, which allows small businesses to deduct up to $500,000 of the cost of depreciating business assets.