Testimony from June 14, 1999

Opening Statement of Senator Pete V. Domenici (R-NM)

Few people know, but Bill Gates' first-choice home for Microsoft was New Mexico. We didn't have the vision and turned him down when he asked for a $15,000 grant from the State Economic Development Department. Software, whatever that was, sounded like a silly idea.

Fortunately, New Mexico's decision only slowed Bill Gates down as long as it took him to get from New
Mexico to Washington. This committee will hear from him tomorrow. Saying no to Bill Gates is probably
one of the greatest economic development mistakes our state has ever made. It is on par with the turn- of-
the- century Patent Commissioner who wanted to close down the Patent office because he didn't think
there was 'anything else left to invent! One of the purposes of these hearings is to make sure that
Congress is informed so that it will make better policy decisions than the two examples I just mentioned.

In fact, the U.S. is really a great incubator for technology. And the information technology sector has
reciprocated by serving our economy well. It has accounted for about a third of the growth in the U.S.
economy since 1992. As a sector, it has been growing about 12 percent a year since 1993. Phenomenal.
Only more phenomenal is the growth in e-commerce. It tripled in 1998 to $9 billion. Congress needs to
recognize that knowledge based industries are extremely sensitive to tax policy and tax costs. The R&E
credit expired again on May 3 1. The credit has been renewed seven times since its creation. We have to
make it permanent. Companies have five to ten year planning time horizons for R&D planning that do not
jive with the six month, one year or 18 month extensions that Congress passes for the credit. Forty-six
Senators have cosponsored one or more bills making the credit permanent. KPMG Peat Marwick study
concluded that one dollar reduction in the after-tax cost of R&D stimulates approximately one dollar of
additional private R&D spending in the short run, and about two dollars of additional R&D in the long
run. In addition to making the credit being made permanent, I believe it should be modified. - base period
used for the regular credit, 1984-88, is out-dated. -50% rule precludes most startups from gaining full
credit. -basic research credit is very difficult to use. -alternative credit provides no strong incentive for
increased research intensity. My bill S. 95 1) increases the maintenance level of the alternative credit to
4% which meets the goals of some groups who favor permanence plus I% addition to the alternative
credit.)

In addition, the Bill: establishes a 20% marginal rate for increased research intensity for users of
the alternative credit, changes the base period for alternative credit users to an 8 year average, eliminates
the 50% rule for users of the alternative credit, encourages industrial partnerships with universities and
national labs, expands definition of basic research to include all published work, enables basic research at
FFRDCs to count toward the basic research credit, qualifies 100% of contract research accomplished at
universities, national labs, and small businesses, encourages establishment of research-driven consortia by
providing 26% credit for their research expenses, provides a phase-in of credit for start-up businesses,
enables small businesses to count patent filing fees toward research expenses. With these modifications,
the Domenici-Bingaman bill provides a permanent Research Tax Credit that address shortcomings in the
current credit. A number of states--40-- the last time I looked have some kind of R&E incentives. It is
time for the Federal Government to make its credit permanent. Another tax issue of great importance to
the technological and information revolution deals with the appropriate tax treatment of e-commerce and
the Internet. The Advisory Commission on Electronic Commerce's recommendations will be as important
as those made by the Augustine Commission in the mid 1980's when that Commission urged the Congress
to preserve the semiconductor industry, and stop the Japanese dumping. There are other numerous issues
on the Congressional agenda that affect the high tech community. Y2K liability reform is expected to pass
the Senate tomorrow. I was very pleased when the Securities Litigation Reform bill was enacted over the
President's veto. Both bills go a long way to eliminate the litigation tax on some of our most prolific job
creating sector-- high tech.

I hope Chairman Greenspan will address his views on the millennium bug problem and its possible impact on the economy. Some businessmen and women I have talked to are shifting from 'just in time" manufacturing to 'Just in case" and as a result are increasing inventories. Privacy on the Internet and encryption are another two important issues as we enter the new century. Federal spending on R&D is important to our economy. There is a strong link between basic research, innovation and increasing the number of high paying jobs. Congressman Sensenbrenner introduced a comprehensive bipartisan bill last week increasing the R&D budgets for National Science Foundation (NSF), NASA, Department of Energy (DOE), National Institute for Standards and Technology, ( NIST) and National Oceanographic and Atmospheric Administration (NOAA). Mr. Chairman, I realize the Committee and Chairman Greenspan are on a tight time frame. This concludes my remarks except to state my conclusion: what's good for high tech is good for the nation. Thank you.com