Innovation has long been the spark that powers entrepreneurship and job creation in this country, and behind nearly every innovation are two of my favorite words: research and development. After all, it’s through R&D that ideas become innovations, that innovations become products and that products transform industries.
Over the past three decades, the research and development tax credit has helped tens of thousands of successful American companies create jobs by incentivizing investment in innovation. There is little doubt that it has strengthened our economy and deserves to be made permanent. But with America’s global manufacturing competitiveness at stake, it’s time Congress shows the same type of support for entrepreneurs and young companies.
Small and startup businesses are driving our nation’s economic recovery and creating jobs by taking risks to turn their ideas into marketable products. Over the past few decades, firms that were younger than five years old were responsible for the overwhelming majority of new jobs in this country.
There are plenty of federal programs designed to help traditional small businesses — retail stores, service providers, restaurants and others — grow from employing one person to employing 10 people, but how do we help the “gazelle” companies reach their potential and grow from employing five people to employing 50? Or 500? Or 5,000?
For these innovators to grow and create jobs, we have to support them in their critical early stages.
This summer, I hosted a series of roundtables with business owners in Delaware, and after listening to the owners of young, innovative companies describe their struggle to capitalize on their ideas, it was clear that finding a way to help them was an economic imperative.
The tax code is a powerful tool in the government’s toolbox, but tax credits can’t help emerging companies that don’t yet have tax liabilities. That takes the R&D tax credit off the table for countless promising startups and small businesses.
For the past few months, I’ve been working with experts and business leaders on an idea to create a new small-business “innovation credit” that would help those young companies. The idea has evolved since April when I introduced it in my first bill as a Senator, the Job Creation Through Innovation Act. The innovation credit would make the R&D tax credit tradable so that certain startups that aren’t yet profitable could sell their tax credit to a larger company.
Take, for example, Elcriton — a small but growing Delaware company that has patented strains of bacteria designed to consume duckweed (common pond scum) and produce biobutanol. It has tremendous potential for job creation. The company is run by two Ph.D.s who put all the money they could raise into early R&D but need more capital to continue to grow the company.
Elcriton might qualify for the R&D tax credit if it was already an established company, but because it hasn’t yet turned a profit (like the overwhelming majority of high-tech startups), it’s out of luck.
Enter the tradable credit.
Fortunately, Delaware is also home to many great, well-established companies, and because those companies turn a profit and pay taxes, they could actually use a tax credit. So Elcriton sells its tradable credit to one of those larger, established companies (in Delaware or anywhere else in the country). The bigger company gets the tax credit, and the newer company gets the infusion of cash it needs to sustain its innovation.
It creates a win-win situation that will help create the next generation of American manufacturing jobs without focusing on a particular industry.
We can’t let tough economic times slow down the power of American ingenuity, especially when history has taught us that now is exactly the time we need to be investing in our innovators. More than half of our Fortune 500 companies were launched during a recession or bear market, so a small business founded this year could become the next General Electric or DuPont if it gets the support it needs.
Congress needs to confront this challenge with the same type of creativity and ingenuity that entrepreneurs bring to their own companies. We can build the next generation of American manufacturing by investing in American innovators today.
Sen. Chris Coons (D-Del.) is a member of the Budget Committee.