Unofficial Transcript of Second day of W&M Oversight Panel Hearing on Code and 'New Economy'

The main panel was composed primarily of business leaders and information technology (IT) executives. Martin Bean of the Technology Workforce Coalition told of the need for information technology training credits to overcome the current shortage of IT workers. American Airlines Senior Tax Counsel Mitchell Salamon said his company recently began providing subsidized computers and Internet access to its employees, but noted that under the current tax rules these computers could qualify as taxable compensation to employees. J. Joseph Hester of the Community College of Allegheny County, Pittsburgh, suggested several initiatives to ensure higher levels of education for the entire workforce. R&D Credit Coalition Chair Bill Sample led the call for a permanent research credit, followed by Linda Evans of IBM's governmental programs, who said the credit "fuels innovation."

Particular emphasis was given to supporting H.R. 5004, the Technology Education and Training Act, and H.R. 4274, the Digital Divide Access to Technology Act (DATA). Ways and Means Committee member Jerry Weller, R-Ill., introduced H.R. 5004 on July 27 and H.R. 4274 on April 13.

[2] As many of you know -- I don't know if any of you gentlemen were here, but our focus was on depreciation. Today we're going to hear from you and others on how our tax laws treat research and development, or cost of maintaining a skilled workforce.

[3] So, what I'd like to do is turn this over now to our senior Democrat on the subcommittee, Mr. Coyne, to introduce the first witness.

[4] MR. COYNE: Well, thank you, Mr. Chairman. As you know, today is the second of the Oversight Subcommittee's hearing to discuss the new economy, and whether the tax laws are current in today's times.

[5] I want to thank Chairman Houghton for scheduling these important hearings; and also I want to personally welcome, Mr. Joseph Hester, from Pittsburgh, Pennsylvania, who is vice president of Administrative Services at Allegheny Community College, and will be our first witness on this first panel.

[6] I look forward to his insights and views on the importance of developing -- coordinating students' educational studies with the workforce skills needed by the business community today, and to the testimony of the other witnesses, both on the first and second panels.

[7] Thank you, Mr. Chairman.

[8] CHAIR HOUGHTON: Thanks very much, Mr. Coyne.

[9] Mr. Weller, would you like to make an opening statement?

[10] MR. WELLER: Well, thank you, Mr. Chairman. Again, I want to commend you for what I believe are very, very important hearings regarding the impact of federal tax policy on technology.

[11] Clearly what was stated on Tuesday was that our outdated tax code is stymieing innovation. It's blocking and depressing job opportunities and wages for workers. So, clearly I think these hearings are extremely important. I look forward to discussing with our panel today a couple initiatives that I feel are extremely important to address the issue of employer-provided computers and Internet access, as well as the need to provide tax incentives for skills training in the workforce.

[12] So, thank you, Mr. Chairman, for the opportunity to participate, and thank you for putting together these panels.

[13] CHAIR HOUGHTON: Thanks very much, Mr. Weller.

[14] Now, Mr. Hester, would you begin with you testimony?

[15] MR. HESTER: Thank you, Mr. Chairman, members of the committee. My name's Joe Hester, and I'm here representing the Community College of Allegheny County.

[16] CHAIR HOUGHTON: Could you bring your mike just a little bit closer?

[17] MR. HESTER: Yes, sir. Is that better?

[18] CHAIR HOUGHTON: Yes, much better. Thanks.

[19] MR. HESTER: I certainly appreciate the opportunity to come and speak to you briefly about Community College of Allegheny County in western Pennsylvania, and its workforce needs.

[20] There's one thing that's clear to us in western Pennsylvania, and I suspect this is true around the rest of the country as well. Today we have more good jobs available than we have people that have the skills and training and preparation to fill those jobs. Our problem is not one of people not having jobs.

[21] They have jobs, but they also have the aptitude to have better jobs if they had the skills and training that they need, and there are good jobs available for them, enticing them into the training program; and giving them that opportunity is the problem that we face.

[22] Community College of Allegheny County has been involved in a significant way in trying to bridge the gap between job demands and the available pool of skilled workers. We have programs in place. We have good programs in place that could provide those skills. The problem is in attracting folks out of the working world and into those training programs to acquire those skills.

[23] What I'm talking about is people who could work at the production level in businesses in western Pennsylvania. We have institutions in western Pennsylvania that do a good job of producing plenty of senior engineers and managers to get organizations started, and opening them up to the public, but we don't have an adequate supply of folks that are prepared to work at the production level.

[24] We have a workforce that could accommodate those requirements if they had the necessary training. We think there are number of options that are available to encourage folks to come into our training programs. A prominent one of those that I would like to suggest to you is encouragement of an apprenticeship programs where people are encouraged to go to work for organizations, and the organizations then provide them with the opportunity to go and get instruction in technical fields while they're learning, also, on the job.

[25] Such programs would allow people the opportunity then to learn on the job and to fill those jobs without walking away from gainful employment to put food on the table for their families.

[26] Section 127 of the tax code already provides some incentives to businesses to pay for ongoing training for their existing employees, and we think that's a very positive provision. We'd like to see it made a permanent provision rather than being continually sunset reviewed.

[27] I'd like to offer a program that we're familiar with from Ohio that might be a model that would be useful in encouraging businesses to become more involved in providing this kind of an opportunity to their employees.

[28] In that program, the community colleges in Ohio are allowed to sell bonds which they then use to finance programs for new and expanding business. The tax paid by those employees in those new expanded businesses then are funneled back to the community colleges for a period to pay off those bonds.

[29] The Ohio experience has been very positive in the use of this kind of vehicle, and it's one that I would recommend to the committee for consideration.

[30] With respect to existing tax law, the Hope Scholarship program is a very positive force in allowing folks to access the educational programs and advance their skills. But it only covers tuition and fees. It doesn't address the living needs of folks that go to community colleges who are normally older than the traditional college student who have families to support and who can't afford to walk away from a job that puts bread on the table.

[31] If the provision of the Hope Scholarship and similar kinds of programs were extended to cover these kinds of other expenses, we think that would be a positive support for community college operations.

[32] [Pause.]

[33] CHAIR HOUGHTON: Is that it?

[34] MR. HESTER: That's essentially it for me, sir. Thank you for the opportunity.

[35] CHAIR HOUGHTON: Okay, well thank you very much. We'll have questions and you can come back and make any other statements you'd like.

[36] I'd like to move to the next individual. Mr. Bean, thank you very much for coming.

[37] MR. BEAN: Mr. Chairman and distinguished representatives, my name is Martin Bean, and I am president of Prometric, Inc., a Thomson Learning Company. Prometric is the global leader in the delivery of computer-based testing services for academic and corporate assessment. More importantly, for today, we're the leader in the delivery of IT certification tests, where every year we deliver over 3.5 million exams. But perhaps more importantly, we touch just about every IT professional in the world seeking to be certified in our industry.

[38] I am here today to speak on behalf of Prometric, but also the Technology Workforce Coalition, or TWC. TWC was formed to address the IT skilled worker shortage, a critical problem in every sector of our economy. Nearly 270,000 unfilled positions were identified in last Fall's workforce study, "The Crisis in IT Service and Support."

[39] The survey of 878 chief information officers and other IT executives found that nearly 10 percent of IT service and support professionals are unfilled in America today. As a result, the US economy losses more than 100 billion dollars in spending each year on salaries and training. The Technology Workforce Coalition advocates federal and state-level solutions to address the shortage, including IT training tax credits, H-1B-V's, temporary visas, K-12 curriculum changes, and teacher training incentives.

[40] While TWC supports a multi-faceted approach, it believes that IT training credits -- tax credits -- would have the greatest impact on the shortage. One of the biggest barriers to IT training is the cost. Small businesses and individuals often cannot afford the cost of training, and more importantly in the IT industry, continuous re-training.

[41] IT training tax credits are market-driven, prudent, cost effective and user-friendly. For that reason, nine members of the U.S. House of Representatives, led by Representatives Jerry Weller and Jim Moran -- and we thank them for that -- introduced bipartisan legislation, H.R.5004, the Technology Education and Training Act on July 27, 2000.

[42] TWC strongly believes that the provisions of H.R.5004 represent the best opportunity to find both a medium and long-term solution to the IT worker shortage.

[43] The IT training tax credit was included on the list of recommendations by the 21st Century Workforce Commission. As this session of Congress comes to a close, it would be a strong signal to American workers that Congress cares about the biggest obstacle to a rewarding IT career, namely getting access to the necessary training and certification that opens the door to the new economy.

[44] Federal legislators also play a key role in determining a critical, but small supply of IT workers that enter the U.S. through the INS H-1B Temporary Visa Program. In fact, I used an INS visa program to come over the United States from Australia.

[45] But although H-1B workers fill a critical role in the IT workforce, the proposed increase in visas will not come close to filling over 850,000 available positions in the United States of America today.

[46] Therefore, while it is extremely important that we work to increase access to foreign IT skilled workers, we must also focus on training more IT workers here in the United States. In doing so, we will silence critics who claim the IT industry and Congress is more interested in importing temporary foreign workers than it is in training U.S. workers.

[47] If business is changing substantially, and it is, shouldn't we also view training in a new way? TWC believes the training program must result in certification. IT certification provides an independent assessment of the worker's skills, and helps determine whether they are qualified for the requirements of the job. Further, it helps ensure that the government investment in training results in the skills truly being obtained.

[48] We understand that time is short here at the end of the 106th Congress. But by linking the IT training tax credit to the H-1B visa legislation, Congress can pass two measures that will significantly reduce the IT worker shortage, implement two recommendations of the congressionally created 21st Century Workforce Commission, silence critics who claim Congress is only focusing on foreign workers, and encourage more IT training for American workers.

[49] TWC believes that there will be a substantial return on investment on the IT training tax credit. U.S. productivity would improve, and the government would quickly recover the cost of the credits through new corporate sales and personal income tax revenue by filling hundreds of thousands of available jobs.

[50] In 2020, we will look back at this period and recognize that either America maintained or lost its position as the global leader, due to its ability to increase the IT workforce. The initiatives I've mentioned today are a win-win for all involved as we prepare for the workforce challenges of the 21st Century and strive to maintain America's global IT leadership.

[51] We thank you, Mr. Chairman, for the opportunity to testify at this hearing.

[52] CHAIR HOUGHTON: Thank you very much, Mr. Bean.

[53] Mr. Salamon.

[54] MR. SALAMON: Thank you, Mr. Chairman.

[55] Good morning, Mr. Chairman, and members of the committee -- subcommittee. My name is Mitchell Salamon, and I am senior tax counsel with American Airlines in Forth Worth, Texas.

[56] American Airlines appreciates the opportunity to address the important role of federal tax law in the new economy. Specifically, we want to tell you about an exciting new program we are implementing to help our employees bridge the digital divide.

[57] Most importantly, we are here to urge you to pass H.R.4274, which will greatly enhance this process -- and I'd like to take this opportunity to thank Mr. Weller and Mr. Lewis for their leadership in this area.

[58] Earlier this year American Airlines and American Eagle joined the ranks of Ford Motor Company, Delta Airlines and Intel by announcing that we would implement an employer-subsidized home computer initiative for our workforce. Under our program, American will subsidize employee purchases of basic home computers with unlimited Internet access.

[59] We anticipate spending over $45 million over the next three years to put home computers into the hands of every employee that chooses to participate. American's home computer program is an employee-empowerment initiative. It also makes business sense.

[60] Computer skills are an essential component of almost every function within the airline industry. American Airlines and American Eagle operate and maintain 970 aircraft, serving 243 cities, with 4,100 daily departures throughout the world. Today I'm delighted to have with me crew chief Thomas Thompson, representing our workforce.

[61] In light of the scope and complexity of our industry, you can see that a technically skilled workforce is vitally important to our success. As you might expect, we rely heavily on advanced technology to run sophisticated reservation, flight and revenue management and maintenance systems, which are continuously modified and upgraded.

[62] Obviously, a workforce skilled in tomorrow's technology will contribute greatly to American's primary goal of delivering the highest quality customer service.

[63] In addition to supplying the hardware, American is developing an "intranet" portal, which will provide an unprecedented opportunity to facilitate effective and timely communication between the company and its employees on issues ranging from company and industry news, corporate policies, surveys, safety issues, on-line training, scheduling flight crew assignments, accessing human resource and benefit information, and leveraging emerging e-business opportunities that are currently under development by the company.

[64] This year American Airlines also created and introduced Flagship University, a virtual institution and library that employees can access through the portal. Flagship University will deliver employee development programs on topics such as airport customer service, handling of dangerous goods, airport security, flight service, environmental issues, work balance issues, substance abuse and leadership issues that we hope will instill knowledge, skills and the attitudes necessary to maximize the long-term potential of our employees.

[65] So far, employee feedback has been overwhelmingly enthusiastic, and enrollment is high. Participating employees pay American $12 per month for three years, and may upgrade and obtain options directly through the vendor at their own expense. Many employees have acknowledged that they would not be able to purchase a computer without the benefit of the program.

[66] Our employees are seizing this opportunity to enhance and develop their computer literacy and consequently, they will be prepared for work assignments and new positions that will continue to evolve with the progression of the information age.

[67] However, without a clarification of tax laws, the potential for adverse tax consequences in this instance will be a significant impediment to implementing workforce initiatives to help close the digital divide. The current tax rules are unclear whether employer-subsidized home computers will be characterized by the IRS as taxable compensation to employees.

[68] The potential tax burden will most certainly reduce the number of employees taking advantage of this opportunity and other employers from making similar investments in their workforce.

[69] For this reason, we believe that it is critical that Congress adopt H.R.4274, the Digital Divide Access to Technology Act, the DATA Act, introduced by Congressman Weller and Lewis. This legislation will clarify that employers can provide subsidized computers and Internet access to their employees as a non-taxable fringe benefit, which will further motivate the business community to bridge the technology gap that currently exists.

[70] Mr. Chairman, thank you for the opportunity to speak before the subcommittee today, and I'll do my best to answer any questions that you or other members may have.

[71] CHAIR HOUGHTON: Thanks, Mr. Salamon. I'd like to turn the proceedings over to Mr. Coyne for some questions.

[72] MR. COYNE: Thank you, Mr. Chairman.

[73] Mr. Bean, you indicated we have to train more IT workers here in this country as opposed to reaching overseas -- not that we're going to refrain from doing that, but we must begin here at home.

[74] I'd like to know what level of achievement, educationally, must a candidate for this training have already achieved.

[75] MR. BEAN: Thank you. One of the interesting things about our industry is that it's extremely egalitarian. The technology changes at such a rapid pace that it has more to do with the person's willingness and aptitude to embrace the technology and learn how to use it than it does to actually have to have reached any particular formal status in our education process.

[76] Many of the certification programs that we sponsor, programs such as CompTIA's A Plus Program, specifically designed to take entry-level workers, who often have very limited formal education, and allow them to take advantage of the new economy by giving them the "just-in-time" industry-level pragmatic training that they need to actually be very relevant to our economy, to actually be able to implement the technology that is out there.

[77] So in short in answer to your question, more than just about any other industry, IT technology relies more on the inherent skills, aptitude and desire of the individual than any formal level of qualification earned.

[78] MR. COYNE: Thank you.

[79] Mr. Hester, why aren't enough of our students being trained to fill the positions that are now being offered to H-1B candidates?

[80] MR. HESTER: Representative Coyne, I think there are a number of reasons why they aren't. One is that those folks that have the aptitude and the abilities necessary to acquire these skills are in today's robust economy, are earning a living someplace else and they're not prepared to come out of that to come into a training program like the Community College of Allegheny County operates in order to acquire those skills at the loss of their ability to put food on the table.

[81] One of the ways that we try to address that is to work with businesses to have a cooperative arrangement with them so that they bring folks that have these kinds of aptitudes, aptitudes that we've tested for, into their businesses and begin to work, and work with us then to provide technical training for them to update their skills while they also learn on the job.

[82] This is an expensive proposition for businesses to engage in, and we haven't developed a tremendous amount of capacity through that. But that's one of the reasons why we haven't been able to fill these needs because we can't attract people with the necessary aptitude out of already paying jobs.

[83] The second is that we have difficulty in attracting the necessary instructional faculty in these areas. These folks are very expensive nowadays, those that already have the ability to work in this marketplace. They're drawing a very high salary, and our salary limitations to some extent prevent us from attracting them into our educational environment to teach.

[84] Something that would be helpful to us is, any kind of mechanism that would make it more attractive for businesses to place their employees on loan to us for a period of time to allow us to train, work in partnership with them to train those necessary production level workers within the salary structures we have to live with.

[85] MR. COYNE: Thank you very much.

[86] Thank you, Mr. Chairman.

[87] MR. COYNE: Thank you, Mr. Coyne.

[88] Mr. Weller.

[89] MR. WELLER: Well, thank you, Mr. Chairman. I think this first panel's been very, very helpful as we talk about the important role, particularly of education and skills training in technology.

[90] I think one thing I've certainly seen -- since this is the second part of a two-day set of hearings -- is how the tax code is having an impact -- particularly on global competitiveness, as we compete with our Asian and European competitors, to attract technology jobs. Clearly the tax code, as well as our investment in education, is going to make a big difference.

[91] You know, it's interesting, we talk about statistics a lot. There are almost five millions Americans today employed in the technology sector. Technology sector wages are about 70 percent higher than the traditional, private sector jobs. So there's a lot of opportunity.

[92] But at the same time, even though there are a tremendous number of Americans employed in technology, we're having a hard time filling all the positions.

[93] Mr. Bean, you noted in your testimony referring to a study that was done this past year that almost one out of ten -- ten percent of IT worker positions are unfilled. Currently almost 270,000 jobs right now are unfilled. That certainly has a big impact on our economy with a loss of productivity and creativity, as well as worker productivity.

[94] That same study I believe you noted indicated that next year we're going to need 1.6 million new workers, and that unless we address this worker shortage that half of those jobs will go unfilled. Obviously the H-1B visa issue -- and of course I'm a supporter and co-sponsor of David Dreier's bill, that's a short-term solution. But I believe, as I know you do Mr. Bean, that the long- term solution is investment and skills training education.

[95] I wanted to ask you, Mr. Bean, why is the skills investment so important as we look at the global competitiveness? You indicated that your company does certification, not only in the United States, but in Asia and Europe as well. So you're dealing with our competitors. But from an American standpoint, from our own parochial interest, why is the skills investment so important?

[96] MR. BEAN: Thank you. I think it perhaps was best summed up by Chairman Greenspan in his Humphrey-Hawkins testimony, where he really described what's fueling our economy today. This IT revolution is what's fueling it largely. And when we look at the magnitude, as you just summed up then for us, Congressman, of all the shortage that faces us, I don't believe there is any other single threat to our competitiveness on the global stage as big as our shortage of IT workers.

[97] This industry, as you know, is summed up in this hearing -- in setting this hearing up. It used to largely be about the hardware and software in the IT industry, but the global stage has shifted. The hardware and software is now no where near as important as what I talk about as the "brainware" in our industry.

[98] That those economies that are going to do best in their ability to compete on the global stage are not those that have the economic wherewithal to invest in the hardware and software as much as those that have the people skilled and educated to be able to translate that on an individual level to an enduring competitive advantage, but on the global stage for America into an enduring competitive advantage.

[99] This global -- the workforce shortage that we have in the IT industry, is not an American phenomenon. It's a global phenomenon. My fear for America is that unless we take steps right now to put the training where we need it to skill the American workers to help the private sector embrace the technology -- fairly rapidly, due to the rate of change of technology -- we're going to slip behind in our ability to remain the leader in the IT industry, something that we should all be very proud of, and we should not let slip away.

[100] Because as Chairman Greenspan said, that is what is fueling our economy today, that is what will fuel our economy going forward, and the greatest asset we have in remaining competitive on a global stage is our investment in our people to embrace that technology.

[101] MR. WELLER: You testified in support of our bipartisan legislation, the Technology Education and Training Act, which provides a tax incentive to attract investment in skills training and investment in people.

[102] MR. BEAN: Yes.

[103] MR. WELLER: Why do you believe a tax incentive is the best way to encourage this type of investment in skills training to solve this problem?

[104] MR. BEAN: I think it's because it puts the private sector in a position to be able to embrace the training that they need to remain competitive. It's extremely pragmatic. It's going to allow them to, as they've done a pretty good job of in the past, adopt those types of education and training programs that they need to remain competitive.

[105] The rate of change of technology is such, as was I thought very well summed up by my colleague to my right, such that you've got to do something different. Formal academic institutions cannot keep pace with technology that changes on average every six months. It also gives the private sector the opportunity, though, to reach out to those workers that quite frankly want their piece of the new economy.

[106] Now if you think about our workers needing to cross the digital divide, as is characterized by all of us in the various pieces of legislation before us, their ability to be able to cross that digital divide is largely a function of our ability to give them the necessary training that they need to be relevant inside the organizations that they work for, both in the public and the private sector.

[107] I believe that the implementation of a tax credit will give us, and give our economy the ability to put the training span where it will do the most for our competitiveness on a global level.

[108] MR. WELLER: Thank you, Mr. Bean. I see, Mr. Chairman, my time has expired. I do have some questions for Mr. Salamon, if there's a second round of questions I'd like to ask Mr. Salamon, after my colleagues complete their first round of questioning.

[109] CHAIR HOUGHTON: Okay, why don't I cut in here. Maybe Ms. Dunn would like to ask some questions and we'll go around for a second round.

[110] The concept of tax credits is a dicey one for us, because we keep loading up tax credits. The President says that we should not use tax credits. Then all of a sudden we have 28 or 30 or 40 or 50 suggestions as far as tax credits. It really complicates the code.

[111] I can understand -- and this is to all of you, really -- the use of tax credits where the incentives have to be essential. For example, I think Mr. Hester, you said something about front-line hourly wage workers in the technical field. I think that's probably a good idea. I'm just talking for myself.

[112] But when it comes to middle or upper management, clearly the success of most of these companies in the information technology area is that they have training programs themselves. You know, they just bite the bullet and they do it, but it doesn't get all the way down.

[113] So the question is, how far should those tax credits go in the organization? Then, Mr. Hester, if you'd like to answer it, Mr. Bean and also Mr. Salamon, as far as you're concerned, I'd like to find out really, sort of -- you know, what percentage of the people you think would be using these computers, and also would they be used for business as well as home use.

[114] So, why don't we start with you, Mr. Hester.

[115] MR. HESTER: It's difficult for me to speak to the general question of how far up in the organization -- that's they way I would put it -- these kinds of tax credits should extend.

[116] Clearly from our perspective, from the community college perspective, where we're involved and engaged in trying to fill the production floor level kinds of jobs that are most needed by all kinds of industries; and where the real shortage of personnel exists. It's in attracting those folks into those training programs, whether they're inside a corporation or in our institutions, exclusively, that we think a tax credit would be very beneficial.

[117] Again, there are other incentives that are very attractive on a normal kind of personal level for individuals and businesses at higher levels of employment to work on maintaining and sustaining their skills.

[118] But the problem of filling available jobs at the production floor level is one that we're all struggling with, and that requires getting folks into the capital development -- the human capital development pool out of the working environment, and we think a tax credit would be very positive for them, and certainly if it didn't extend any farther, we certainly hope you'll consider that.

[119] CHAIR HOUGHTON: So the question is to take the front-line workers -- to get them there, and then to keep them there.

[120] Mr. Bean?

[121] MR. BEAN: I think the question is best answered at two levels. I think in addition to looking at how far down in an organization that this tax credit should apply to training, but also across the industry sectors in terms of the size of the companies.

[122] By 2002 the U.S. Department of Labor estimates that over half of U.S. workers will require some type of IT skills training. I actually believe that that's a conservative estimate. I think that it would be more than half; and if you think about that means the answer to your question, Congressman, is that just about every level in the organization should be able to take advantage of IT training.

[123] The reasons for that are many. If we look at the rate of change inside all organizations, not just the IT sector, but any company that seeks to embrace technology to remain competitive. What we've seen over recent years with the proliferation of the Internet through organizations and the ability for every worker to tap into the information they need to do their job, I think the answer is that every worker of the future needs to be able to take advantage of IT training to remain individually competitive, but also competitive in the economy.

[124] I also want to stress --

[125] CHAIR HOUGHTON: I agree. The question is, just how far down does the government get into the process?

[126] MR. BEAN: I'm sorry, how far down does the government get into the process of the tax credit? I think that the more flexible that we can be in actually allowing organizations to make the decisions of what IT training they need to be competitive is the right answer to that question.

[127] I think the more broad ranging we can be with the tax credit to allow the money to be put where it's going to be of greatest advantage is where we need to head.

[128] CHAIR HOUGHTON: Okay, thanks very much.

[129] Mr. Salamon?

[130] MR. SALAMON: Thanks, Mr. Chairman.

[131] In response to your question, so far we've distributed about 40 percent of the enrollment kits to our workforce. So, in essence, the workforce has -- 40 percent of the workforce now has the ability to enroll in the program. Sign-ups at this point have been about 70 to 80 percent, and we contemplate that upwards of 90 percent of eligible participants are going to take advantage of this program. It's been met with a lot of enthusiasm.

[132] These computers will be used at home. They'll be used outside the workplace. From our standpoint, clearly there's going to be some personal benefit here. But the compelling business motivations for us to do this clearly outweigh any personal benefit that employees --

[133] CHAIR HOUGHTON: But they would probably be used at home and not in the business place, you say?

[134] MR. SALAMON: Not in the business place.

[135] CHAIR HOUGHTON: Thanks very much.

[136] Ms. Dunn?

[137] MS. DUNN: Thanks very much, Mr. Chairman.

[138] Mr. Bean, you talked about the certification process. Could you explain the certification process to us? Are you -- if you're certified in one state, are you automatically certified in another state?

[139] MR. BEAN: Thank you for the question. Yes, the certification process is actually one of the truly portable qualifications in the world. In the IT industry, which is what we're speaking about, specifically today, the test that somebody would pass in my state of Maryland versus the test that somebody would pass in California, because it's all delivered via a computer, is exactly the same.

[140] So the qualification itself is not only transportable across states, but also national frontiers as well.

[141] MS. DUNN: And would you just run through what it involves?

[142] MR. BEAN: Sure. The process is largely the combination of learning and then testing. The certification really being the outcome of the learning. The way an individual can learn to be qualified to take an IT certification is very liaise-faire.

[143] You can learn either though self-study on the job by attending formal classroom training, attending web-based on-line learning, and the certification exam itself, which takes place in a secure testing center on a computer terminal that asks you a series of questions that a simulation-based, multiple choice, true/false scenario driven are then the final outcome on which the certification is granted by either the industry association, such as CompTIA, or for that matter vendors, such as Microsoft, Novell, Computer Associates, et cetera.

[144] MS. DUNN: Also, Mr. Bean, could you tell us, is the worker training credit, is that in place of section 127, or is that in addition to section 127?

[145] [Pause.]

[146] MR. BEAN: Sorry for having to check. It is in addition, ma'am.

[147] MS. DUNN: Thank you very much.

[148] CHAIR HOUGHTON: Good.

[149] Mr. Weller.

[150] MR. WELLER: Thank you, Mr. Chairman. Thank you for the courtesy of the opportunity to do a second round of questioning.

[151] I'd like to direct a few questions to Mr. Salamon. You know, there's always interesting statistics. You have 100 million Americans today that are on line. Seven Americans go on line for the first time every second. So there's a tremendous opportunity for working Americans to gain information, and participate in the new economy in many ways.

[152] But if you look at other statistics, you note that households with incomes of $75,000 or more are 20 times more likely to have a computer or Internet access at home. Educators tell me they notice the difference in the classroom between kids who have a -- students who have a computer and Internet access at home and those who do not, in the ability of the children to do their homework and school work, and do work on a school paper.

That why I really want to salute American Airlines as well as Ford, Intel and Delta Airlines for stepping forward and providing computers and Internet access as a solution to that challenge. That's 600,000 families, as a result of your company and three others. I know with Ford Motor Company, almost 5,000 families in my district will benefit from what Ford Motor Company is doing.

[153] As a result of your initiative, everyone from the laborer, the assembly line worker, the baggage handler, the flight attendant, all the way up through management, their children will now have computers and Internet access at home to do their homework.

[154] That's why I want to thank you for your company's leadership in doing this. I also want to thank you for bringing one of your fine workers with you, Tom Thompson, whom I understand is employed out at Dulles Airport. You do a great job. I've flown in and out of there on American Airlines and appreciate the good work you do, as an example of an employee that would benefit.

[155] It's my understanding that unless our legislation is passed and signed into law, the IRS could impose a tax on workers for receiving employer-provided computers and Internet access. Our estimates from our staff analysis would estimate that a worker making about $27,000 a year would pay about $200 in taxes, if they choose to accept these computers and Internet access. For a worker making $27,000, 200 bucks is a lot of money. It's real money for working people.

[156] You know, Mr. Salamon, let me just ask a few basic questions of you. Tell me, how many American Airline employees have actually received computers as a result of your initiative? I know you had indicated you're going through the sign-up process, are they actually receiving computers and Internet access in their home at this time?

[157] MR. SALAMON: Many of them that are already signing up, they receive it within the week they sign up, typically. Forty percent of the workforce now has the forms to sign up and it's going like gang busters.

[158] There's a six-month window, really, to sign up. But the reaction up front has just been tremendous. The phones are ringing off the hook.

[159] MR. WELLER: So there's a lot of enthusiasm.

[160] Have you had, because of this tax issue -- I know I've spoken with actually one of your other employees who said, there's a little bit of a buzz amongst the employees. They had heard the Department of Treasury and the IRS may tax their computer benefits. Have you had concerns expressed to you by employees?

[161] MR. SALAMON: Yes, sir, in our focus groups that was a concern that was discussed right up front as we mentioned the possibility of a tax on distributing the computers; and the indications from them were that they would have to take that into account into whether or not this was something they'd want to participate in, or whether they really could afford to.

[162] MR. WELLER: Have employees expressed hesitancy -- been hesitant about accepting these computers, because you know a worker making $27,000 would have to pay $200 in taxes. Have some said they might not accept it because of that concern for the taxes?

[163] MR. SALAMON: In our original focus groups, that was a concern.

[164] MR. WELLER: Have you had other companies that have expressed interest in providing this type of benefit to their employees, have they consulted with you about potentially doing this and expressing concern regarding this potential tax consequence?

[165] MR. SALAMON: Yes, Mr. Weller. Aside from the companies that you mentioned, we have been contacted by three or four companies that are exploring this as a possibility, and are also concerned about the tax issue and wanted to consult with us on where we were on the tax issue.

[166] MR. WELLER: Okay.

[167] One of the initiatives when Representative Lewis and I joined together to offer this bipartisan legislation was to clarify the tax treatment of employer-provided computers and Internet access. Of course, we would like to see it treated the same as employer contributions to a pension benefit, or employer contributions to a health care benefit.

[168] We believe it's good policy to eliminate the digital divide. Of course, because of your company's leadership and the others that are moving forward on this, we now have an opportunity, essentially, for universal access for every working American that's employed by American Airlines or other companies to have access to the Internet, and of course, the opportunity that it provides.

[169] From an essentially -- if I can use the term "quality- control" -- standpoint, what type of conditions do you have for the employees on their ability to use these computers to ensure the computer stays in the home and doesn't wander off, if the employee is terminated or decides to leave their position? What type of controls do you have?

[170] MR. SALAMON: The way we're implementing our program and each program, obviously, is going to be different; but the way American's program works, the computers are theirs. There's a significant co-payment that they're making in their partnership in the program. The computers are theirs.

[171] We anticipate that they're going to make good use of the computer. There will be some personal use. Clearly there's going to be business use that's going to benefit both them and us in the long run.

[172] In terms of other controls, we have the policies in place about responsible behavior with the computers, but there's really essentially no monitoring going on. We have a lot of trust in the workforce. This is an initiative of faith that really is for their benefit in the long run, and we trust that they'll use it appropriately.

[173] MR. WELLER: Just a final, quick question.

[174] Will these employees be able to use these computers, obviously, to access their employee benefits, see where their pension is? If they have questions regarding that health benefits -- is the type of use you anticipate?

[175] MR. SALAMON: That's absolutely part of the game plan.

[176] MR. WELLER: They can do it from home?

[177] MR. SALAMON: There's a whole host of information available right through our Internet site. They'll be able to customize their own personal Internet site for workforce information that's particularly relevant to them, and they'll have just continuous access. It will be a great way for us to communicate back and forth very effectively.

[178] MR. WELLER: Thank you, Mr. Salamon, and thank you for bringing Tom Thompson, one of your workers from Dulles Airport with you today, as well; but thank you for your time in participating.

[179] MR. SALAMON: Thank you for the opportunity.

[180] MR. WELLER: Mr. Chairman, thank you.

[181] CHAIR HOUGHTON: Okay, thanks very much.

[182] Ms. Dunn?

[183] MS. DUNN: I think we've got an outstanding panel here and I want to take advantage of your creativity by asking you a question that is very basic to a lot of us in the Congress now.

[184] In the last couple days, we've read about the number of teachers who are going to be retiring over the next few years, and at the same time we've read a lot about "baby boomers" with technology backgrounds who are thinking about taking early retirement to do something else.

[185] I am a former IBM systems engineer. What kind of tax incentives and educational incentives would you like to see, or would be effective in recruiting people with technology backgrounds to go into teaching so that they can truly develop a group of young, educated people who will be able to have good technology skills as they graduate from high school or college? Any thoughts other than better salaries as teachers?

[186] [Pause.]

[187] CHAIR HOUGHTON: Don't all speak at once.

[188] MR. BEAN: It's a very good question, and obviously the teacher shortage is, from an educational perspective, apparent and is just going to be a significant challenge for all of us on a global stage when we just talk about broad learning competitiveness, as well.

[189] As I sit here, as somebody like you who's come up through the IT education industry -- in the IT industry, and I think what it would take for me to be able to go back and do that, I think the types of incentives that are going to be important is, firstly, a recognition as it was summed up before.

[190] That when you look at the delta that exists between what is paid to our teachers in the IT arena to actually impart those skills versus what is earned in the private sector, I think there's going to have to be something done for teachers just to stay in place.

[191] For those that aren't looking to leave their particular profession, what are we going to do for them to actually stay in place as teachers, rather than to be poached by HR managers looking to fill their depleted ranks inside corporate America, as well.

[192] So in terms of tapping into the creativity today, I'd say we need to first of all address the incentives for the teachers to stay put; and I hate to say it, but I can only think that has to start with economic incentives, given the disparity that exists between what IT teachers are paid versus what they can earn in the private sector by moving into system engineer type roles.

[193] Secondly, to attract those people back into teaching, which I think is something that many of them would be extremely interested in doing, what we need to take a look at is to make sure that our taxation system doesn't duly penalize them for wanting to impart those skills to young people or people of all levels.

[194] So instead of necessarily putting incentives in place, let's revisit our taxation system to make sure that if you or I sought at our level, at our point of retirement, which these days can be in our early 40s in the IT industry, that we're not penalized for wanting to go back into the school system and actually give of our expertise to young people so that they can move forward.

[195] CHAIR HOUGHTON: All right, fine. Gentlemen, thanks very much. You've been very, very helpful.

[196] I'd like to call the second panel. Bill Sample, chairman, R&D Credit Coalition, Redmond, Washington, and senior director, Domestic Taxes and Tax Affairs at Microsoft; and Mr. Randall Capps, corporate tax director and general tax counsel, Electronic Data System Corporation; Linda Evans, program director, Taxes and Finance, IBM Governmental Programs; and Collie Hutter, chief operating officer, Click Bond, Incorporated, Carson City, Nevada.

[197] Thank you very much for being with us. Mr. Sample, would you begin your testimony?

[198] MR. SAMPLE: Thank you, Mr. Chairman, and members of the subcommittee. My name is Bill Sample, chairman of the R&D Credit Coalition, and senior director of Domestic Tax and Tax Affairs at Microsoft.

[199] I'm here today on behalf of the R&D Credit Coalition, which represents 87 professional and trade associations, and more than 1,000 U.S. companies. We thank you for focusing on the tax treatment of R&D as part of your hearings on the tax code and the new economy and applaud the members of this committee for their continued commitment to a permanent R&D tax credit.

[200] As Chairman Houghton stated when announcing this hearing, the new economy is based on high-tech equipment, intensive research and development, and a skilled workforce. The R&D tax credit, according to many government and private sector experts as listed in my written testimony, is a proven, effective means of encouraging increased R&D activity in the United States, which in turn will help provide technology improvements to benefit the economy.

[201] I've spent the last ten years working in the software industry and strongly believe in the economic and social benefits that result from high-risk investments in technology research. The last ten years have also been very good for the U.S. economy and the products of technology research have helped create the budget surplus that's currently paying down the national debt.

[202] Technology-driven increases in productivity have also created more jobs for U.S. workers. Business Week recently reported on a NABE survey of economists that lowered the estimated maximum sustainable unemployment rate that would not fuel inflation from six percent down to 4.5 percent. That 1.5 percent represents a significant increase in available jobs.

[203] The R&D credit encourages companies to hire more high- skilled, high-paid workers to fill those jobs. I would like to underscore the ripple effects of the economic success created by technology research on a more individual level. Whether it is the $18 million donated by Microsoft employees to United Way in 1999, the software and hardware donated to schools and non-profits by our employees and business partners, the educational software that my two children use at home and at school, or the e-mail and Internet technology that enables my wife to be den mother to my six-year old son's tiger cub troop, the economics and social benefits of technology are helping many people improve their lives.

[204] These stories are repeated over and over again in a thousand companies that make up the R&D Credit Coalition.

[205] This committee plays a critical role in overseeing that the U.S. Treasury and Internal Revenue Service properly administer the law, consistent with congressional intent. As the person responsible for much of Microsoft's tax compliance, I can tell you that regulations and other administrative guidance often have more impact on our tax liability than the statutory language.

[206] In recent years, the U.S. Treasury and IRS has administered the R&D credit rules in such a way as to attempt to significantly reduce the scope of research activities eligible for the R&D credit. Despite clear guidance provided by Congress and the committee report language accompanying the 1998 and 1999 extensions of the R&D credit, and separate letters from committee members to Treasury, the IRS continues to apply the discovery test, common knowledge test, and process of experimentation requirements of its proposed regulations defining eligible research pursuant to IRC section 41(d) in its examination of taxpayers.

[207] Recently, a court admonished the IRS for taking positions that were clearly unsupported by the law. In Tax and Accounting Software, Corp. versus the United States, the court rejected the IRS proposed discovery and common knowledge test. The court held the IRS', and I quote, "Construction of the statutory language would be a strained and improper reading without any support in the legislative history to back it up." And further, the IRS is completely missing the fact that Congress intended to encourage commercial research through the enactment of the R&D credit.

[208] With respect to the process of experimentation requirements in the proposed regulations, the tax court found that, and I quote, "The highly structured definition of research, which is proffered by the IRS in its regulations, makes it virtually impossible for commercial research to qualify for the section 41 credit, which was clearly not the intention of Congress."

[209] In conclusion, we should seize on the opportunity we have to take it one -- at least one critical positive step towards a 21st century tax code. Make the R&D credit permanent.

[210] Thank you and I'm happy to take questions.

[211] CHAIR HOUGHTON: Thanks very much.

[212] Mr. Capps.

[213] MR. CAPPS: Good morning, Mr. Chairman, and members of the committee. My name is Randy Capps, and I'm tax director for Electronic Data Systems Corporation. I'd like to thank you for this opportunity to speak with you about the research and experimentation tax credit.

[214] EDS has been a leader in the information technology services industry for more than 35 years. Our leadership depends on continuous re-invention of our products and our services. Our 120,000 employees deliver management consulting in electronic business solutions to more than 9,000 business and government clients in over 50 countries.

[215] Each year we spend more than $1.7 billion on a wide range of research and development. EDS researchers have, for example, developed programs that help health insurers control cost. We developed a manufacturing system using a computer language tailored for the semiconductor industry that guided silicon wafers from one production location to another. We're focusing today on development of programs to guard against cyber terrorism in the digital economy.

[216] My industry was borne out of high-cost, high-risk research. It is driven by creativity of thousands of innovative corporations. The R&D yields products and services that are improving lives and generating productivity increases throughout the economy.

[217] Since the R&D credit was enacted in 1981, it's been extended ten times. With each extension, Congress indicated strong bipartisan support. Last year, Congress extended the credit for five years.

[218] Earlier this year, the Senate voted 98-to-1 in favor or an amendment to the estate tax bill, that would have made the credit permanent. All amendments were stripped from the final bill, but the bipartisan support was a strong indicator of the importance of the credit to members from all parts of the country.

[219] So, why is the credit so important? First, it offsets the tendency for under-investment in R&D. The single biggest factor driving productivity growth is innovation. However, companies cannot profit from the indirect benefits of the technology to the economy. As a result, the rate of return of R&D to society is twice that which accrues to an individual company.

[220] The second reason why it's so important, the credit helps U.S. business remain competitive in world markets. Foreign governments are competing aggressively for research investments by offering substantial tax and other financial incentives.

[221] Companies that do research in the United States are at a disadvantage when competing with foreign-based, multinationals that have lower research costs.

[222] Third, R&D spending is very responsive to the credit. Economic studies of the credit have found that a $1 reduction in the after-tax cost of R&D stimulates approximately $1 of additional private R&D spending in the short run, and about $2 of additional R&D spending in the long run.

[223] Most important, research and development is about jobs and it's about people. Investment in R&D is ultimately an investment in people, their education, their jobs, their economic security and their standard of living.

[224] Dollars spent on R&D are primarily spent on salaries for engineers, researchers, and technicians. At EDS, more than 90 percent of the expenses qualifying for the R&D credit go to salaries for U.S. employees who are directly involved in research.

[225] When R&D results in new products and services, the incentives that support R&D translate into salaries of employees in production, administration and sales. By making other industries more competitive, research in one industry contributes to the creation of jobs across the entire economy.

[226] Research projects cannot be turned on and off like a light switch. The most important thing that you as leaders in the tax legislative process can do to promote sustained investment in long- term research is to make the credit permanent.

[227] House Speaker, Dennis Hastert; Minority Leader, Dick Gephardt; Senate Majority Leader, Trent Lott; Minority Leader, Tom Daschle; Vice President, Al Gore; and Texas Governor, George Bush, have all endorsed the permanent R&D credit.

[228] This weeks issue of Time magazine includes a story entitled, "Hurray for R&D." It's time to make a popular and effective tax credit permanent. That's exactly what I'm asking you to do.

[229] I thank you and I'd be happy to answer any questions you may have.

[230] CHAIR HOUGHTON: Thanks very much, Mr. Capps.

[231] Ms. Evans, we're going to have to break pretty soon, but please go ahead with your testimony -- and we'll suspend and then we'll come right back.

[232] MS. EVANS: Okay.

[233] Mr. Chairman, members of the subcommittee, on behalf of IBM, I thank you for the opportunity to share our views on the R&D credit. My name is Linda Evans, program director for Finances and Tax Policy, with IBM Governmental Programs.

[234] As a key player in the information technology industry, or IT, IBM strives to lead in the creation, development and manufacturing of the industry's most advanced information technologies, which includes computer systems, software, networking systems, storage devices and microelectronics. We also have a worldwide network of services solutions teams that translate these advanced technologies into value for private and public sector customers.

[235] Without question, the key to IBM's success is its record of innovation, which is made possible by R&D. The R&D credit and the alternative incremental research credit, or the AIRC, are useful tools to facilitate business research investment -- and I'll speak more about that in a minute.

[236] I'd like to first say a few words about the power of the IT industry, and how it brings value to the economy and to society. I think it fair to say that the IT industry's had a significant impact on the growth of the United States economy, and according to studies by the Department of Commerce, while IT growth accounts for a relatively small share of the economy's total output -- about 8.3 percent in 2000 -- that growth has contributed to nearly a third of real U.S. economic growth between 1995 and 1999.

[237] Productivity is a measure of economic health, and as you know, Federal Reserve Board Chairman, Alan Greenspan, has said on more than one occasion that information technology has had a positive effect on productivity growth. Further, according to the Department of Commerce, IT and electronic commerce, which are part and parcel to the new economy, will drive economic growth for years to come.

[238] Now, how is this phenomenal growth sustained? The relentless drive of IT which fuels productivity and brings other societal benefits, relies heavily on R&D, which is the life blood of innovation. The IT industry must innovate to survive.

[239] What role does the credit play in all of this? With the R&D credit, the government is supporting the view that R&D is essential for innovation and economic growth. Last year's five-year extension of the credit and improvement of the AIRC, provides some of the predictability that the industry has sought over nine years of annual renewals.

[240] A permanent credit, of course, would provide even greater certainty for companies that are planning long-term research investments -- and we thank you for the last year's extension.

[241] A testament to the value of R&D and innovation for IBM is the fact that for the seventh year in a row, the company has earned more U.S. patents than any other company in the world. In fact, in 1999, IBM earned 2,756 patents, which was 900 more than the next company.

[242] IBM continues to seek ways to make computer technology work faster and more effectively. This includes breakthrough chip- making processes to produce the next generation of computer chips, which is the brains of the computers; and progress and storage density, to make products for increasingly mobile workers in the new economy, who will need the convenience of portability and greater computing power.

[243] The computing power, software developments and simulation capabilities of IBM's technology, are bringing better understanding and faster solutions to the world scientific, medical and environmental programs.

[244] For example, a big challenge for IBM is to simulate the folding of a complex protein, and for that IBM will build a super computer called "Blue Gene," whose power will be needed to unlock the code of some three billion chemical structures. And --

[245] CHAIR HOUGHTON: May I interrupt a minute? Listen, I'm terribly sorry, but since I'm the only one here and I've got to go and vote, could we suspend the proceedings and I'll rush over and I'll come right back.

[246] MS. EVANS: Certainly.

[247] CHAIR HOUGHTON: And I'll wait for the finish of your testimony, then we can move to Ms. Hutter. Okay?

[248] MS. EVANS: Certainly.

[249] CHAIR HOUGHTON: Thanks very much.

[250] [Break.]

[251] CHAIR HOUGHTON: Let's continue.

[252] Ms. Evans, right in mid-sentence, hey?

[253] [Laughter.]

[254] MS. EVANS: Thank you, Mr. Chairman.

[255] The computing power, software advancements and simulation capabilities of IBM's technology are bringing better understanding and faster solutions to the world's scientific, medical and environmental problems.

[256] For example, a big challenge for IBM is to simulate the folding of a complex protein, and for that, the company will build a super computer called "Blue Gene," whose power will be needed to unlock the code of some three billion chemical structures, and there is "Deep Thunder," IBM's weather modeling visualization system, that will more accurately predict local weather patterns and violent weather phenomena, such as thunder storms and wind shear.

[257] IBM uses it's IT to leverage the power of the Internet to help businesses of all sizes expand their reach in electronic commerce. In the area of education, improving K through 12 and life- long learning are important national concerns, and IBM's strong historical commitment to improving schools, leads us to develop technologies and expertise for teaching methods, including Internet- based methods, that will facilitate and improve the way kids learn, and the way teachers teach.

[258] In conclusion, today you will have heard from my colleagues and myself about some of the ways our companies innovate. You will have learned that innovation is a central focus of the IT industry, and that research and development fuels innovation. The research credit remains an important tool in creating a positive environment for this to continue.

[259] Thank you very much.

[260] CHAIR HOUGHTON: Thanks very much.

[261] Okay, Ms. Hutter.

[262] MS. HUTTER: Thank you Chairman Houghton, and members of the subcommittee for the opportunity to testify regarding the tax treatment of R&D. I'm Collie Hutter, chief operating officer and owner of a small, 75-employee manufacturing company called, Click Bond, Incorporated. We're located in Carson City, Nevada.

[263] As the owner of a company engaged, both in performing R&D, and applying the technological advances derived from R&D, I strongly advocate that the R&D tax credit be made permanent.

[264] By way of background, my undergraduate degree is physics from Carnegie Melon University, and I earned an MBA at the Wharton School at the University of Pennsylvania. Currently I am on the board of directors of the National Association of Manufacturers.

[265] I will share with you how R&D applied in my own business has produced technological advances that have kept my company growing. Since 1969, I have been a business owner of first a research and development company, and now a manufacturing company that engages in considerable R&D.

[266] Click Bond designs and develops and manufactures fasteners, screws and nuts for the aerospace defense market. All of our fasteners are designed to be adhesively bonded for surface mounting. Click Bond's customers are primarily the aircraft manufacturers.

[267] We transform from pure R&D company to a manufacturing company in 1987 by default. At that time we were unable to license the Click Bond technology to another manufacturer, as we had been able to do with the other products we had developed. Since we strongly believed in this particular product line, we went into the manufacturing business ourselves.

[268] I suppose it might be said that my company moved backwards from being a new economy company, one based in high-tech equipment, intensive research and development, and a skilled workforce, to an old economy company that employs less skilled people. That is not true.

[269] Our skilled scientists and engineers are still doing their innovative work, but are more focused on one type of product. We like to think that we expanded our horizons by converging a traditional manufacturing company with technology to become a new manufacturer in the new economy.

[270] My company has benefitted from the R&D tax credit in three ways: One, through direct use; number two, from the flow-down from our suppliers, who utilize the tax credit; and indirectly, through the high-tech products developed in use with the credit.

[271] The direct benefit is that a number of years ago I was able to use the credit, and it was a sufficient amount of money for our company to apply for an additional patent. The major benefit we have is the flow-down benefit. The Click Bond fastening systems are possible, because chemical companies -- many of which use the R&D credit, have developed the high-strength, fuel-resistant, high temperature epoxy and acrylic modified adhesives. They're used to bond our fasteners to the aircraft and other surfaces.

[272] These same chemical companies also developed and brought to market the high-strength plastics from which we make our fixtures that hold our fasteners in place. The credit encourages them to continue and to expand their research into new products.

[273] An indirect benefit we have of the research and development is that Click Bond uses the products developed and brought to the market by the new economy. These new economy products provide the tools to control my manufacturing process, design my parts, increase the efficcompanies, over 75 percent of the expenditures are for additional salary and wages. In our industry, it's over 90 percent.

[274] CHAIR HOUGHTON: Okay, good. Thanks very much.

[275] Mr. Coyne?

[276] MR. COYNE: Thank you, Mr. Chairman. I'd like to ask the panelists the nature of your R&D, if your company is affected by the fact that, you know, you were on a four-year leash as it relates to R&D, as opposed to if it were permanent? Would the nature of your R&D change? Would it be different?

[277] MR. SAMPLE: I don't think the nature of the R&D would change in that in order to have a successful R&D project, you're going to have to commit to making a long-term, multi-year investment in product development.

[278] The impact of making the credit permanent would basically increase the incentive that's provided by the R&D credit for companies to do even more R&D than they're doing now.

[279] MR. COYNE: Anyone else want to comment?

[280] MR. CAPPS: It affects your ability to model a benefit for currently more than four years. Next year, more than three years. At EDS, most of our research projects are multi-year projects. So that becomes an issue. You can't outlook the full benefit, so you're not getting the full bang for your buck.

[281] MR. COYNE: Did either of you want to comment?

[282] [No verbal response.]

[283] MR. COYNE: Okay. I wonder if you could comment on how real or unreal is the problem that we hear so much about business not being able to hire and find -- find and hire trained workers to do the necessary work that the corporations have to do?

[284] MR. CAPPS: I think it's a very real issue. I think we're already seeing it and experiencing it in the information technology industry. I don't know what the exact numbers are, but I've heard we've got over a million unfilled positions as I'm speaking to you.

[285] Those are good positions, high skilled, high paid positions, and there aren't the people to fill them. They're projecting that number's in the order magnitude of four million unfilled positions by 2004. So it's a real issue. It's an immediate issue we're facing today.

[286] MR. COYNE: How about IBM and Microsoft, and Ms. Hutter?

[287] MS. EVANS: We're experiencing the same thing, and clearly in the area of science and engineering, it hasn't been really as great a focus in this country, certainly in the K through 12 level. We're finding the shortage of people in those skills in this country, and we have had to use the H-1B visa program to fill those jobs.

[288] I also don't know the numbers, but it's very real in the IT sector where the skills required are exponentially -- increasing exponentially as the technology changes. So, it is a problem.

[289] MS. HUTTER: I just want to follow up. That is a problem, even on the level that we're working. It's obviously much different, but even in our small company we have three vacancies in our engineering department. Also, the caliber of engineers.

[290] The example of my getting old, but some of these young people coming out of the schools they know an awful lot about computers, but they don't know what they're looking at on the screen. They've never actually gone out and had to make something. That's one problem that we're seeing.

[291] MR. SAMPLE: It's probably one of the most important issues facing our company, as we look to how we're going to continue to succeed and grow.

[292] I think we ended our last fiscal year with over 4,000 unfilled, permanent, full-time positions; and I think we're going to plan to hire another 4,000 plus this year. I don't know where we'll be able to find them.

[293] The increase in the high-tech economy in the Puget Sound area, as well as the nation as a whole means we're competing now with, you know, real networks, with the Amazon -- you know, a lot of high-tech companies, and we just can't find the people to fill the jobs.

[294] MR. COYNE: Does this extend to the floor workers, people working on the floors of the factories? Or is it just the engineers, high-tech and computer science engineers and technicians?

[295] MR. SAMPLE: In our company, very few of our employees are involved on the operation side. Most are development, sales and marketing, technical jobs. It extends across the board.

[296] MR. CAPPS: I think the numbers I was throwing out are more for the skilled workers that have a higher level of education and training, but I think we're starting to see strains on even the lower end of the workforce. So it is a broader issue. It goes deeper.

[297] MS. EVANS: I would agree with my colleagues. The upper end is probably where the greatest short is, but it is starting to be apparent at the lower levels, too -- lower skilled people in our industry.

[298] MR. COYNE: Thank you.

[299] CHAIR HOUGHTON: Ms. Dunn.

[300] MS. DUNN: Thank you, Mr. Chairman.

[301] It's been a fascinating panel. It's interesting as we reach out. I want to particularly -- I don't see what's wrong with moving to the West, Mr. Chairman. I think moving to the West is a good thing.

[302] [Laughter.]

[303] MS. DUNN: There's a lot of appeal in beautiful states like Nevada and Washington.

[304] CHAIR HOUGHTON: You're out voted two to one.

[305] MS. DUNN: I'll bring in my support group next.

[306] I want to especially welcome Mr. Bill Sample, from Microsoft. Who in my neck of the woods, certainly has done as much as any company in the nation -- I'm sure in the world -- to educate people on a variety of tax issues -- tax-related issues, taxation on the Internet, these issues we're talking about today, R&D credits -- which I have never found anybody who doesn't agree that we should have permanent R&D credits.

[307] It's just a monolithic movement over the last few years and frustration when we couldn't get it made permanent last year. We did get it to at least cover the next five years.

[308] So, it's something that I know is very important and you have a great support group here in the Congress. If we can make sure we can find the money to fund it.

[309] I wanted to just ask a very practical question that would help me to imagine the practical effects of the unpredictability if the R&D credit is not made permanent. In the last few years, it's been for fewer than five years. In some cases, I think we've gone past the deadline, and we had to do a "catch-up" R&D.

[310] What actions do your companies take in order to deal with this unpredictability, and what kind of costs do you incur? What can we use in talking about this issue that is real life from the front lines to help us bring on the folks who don't understand the value of the R&D tax credit?

[311] Mr. Sample, maybe you'd like to start.

[312] MR. SAMPLE: Thank you. Well, as I said, our R&D projects are planned years in advance, and you know, at a minimum we spend probably three to five years on a particular product. Windows 2000, which we released last Fall, began development in the mid-'80s.

[313] So, every year when we go through our budget cycle, we have to make commitments to projects which -- you know, our level of effort we know is going to have to be maintained years into the future.

[314] In the '80s, I think the financial people in our industry were more willing to rely on extensions of the R&D credit when looking out over two, three, four-year time horizons. But in 1995, the credit lapsed and it wasn't extended until the following year and there was a 12-month gap where there was no credit. After that 12- month gap, I don't know any tax professional that would recommend to their CFO to count on the credit beyond the extension period. From '95 to '96, there was a 12-month gap.

[315] So, I think it's more critical now, after the '95-'96 gap, than it ever has been to make the credit permanent.

[316] MS. DUNN: Anybody else wish to comment on the cost to your company, or your business plan as you see that there is some unpredictability?

[317] MR. CAPPS: I think our experience at EDS has been similar to what Bill described at Microsoft. Before we had the gap, I was predicting with more confidence that the credit would be extended, and recommending to our people, recognize that and take that into account.

[318] But, since that, it's -- we discounted that a certain amount and it just hasn't carried the same weight that it would if it was permanent.

[319] MS. EVANS: And the case at IBM, certainly long-term planning is very critical and we would experience the same thing. So to the extent that you have a sufficient horizon for these projects, some of which I talked about earlier, tapping some of the major medical and environmental issues. It's difficult for you to be able to plan and predict when you have these long-term projects. So, it is a problem for us.

[320] MS. HUTTER: I think a pervasive argument, even in the small companies, is that R&D is inherently risky; and when you're now having an additional risk of a credit that you're counting on that's supposed to be your incentive is also at risk. In other words, it's just a multiplier.

[321] I think that for us, at least, you can't count on it. That makes another uncertainty which tends to take money away from that type of work.

[322] MS. DUNN: Let me just ask one brief question, Mr. Chairman. The R&D can only be applied to research and development done in the United States.

[323] How extensive is that credit? Are you finding that your companies are restricting R&D to the United States, because the credit means enough to you, or are you going overseas?

[324] MR. SAMPLE: Every year over the past several years, we've been increasing our R&D spending in the U.S. by probably three quarters to a billion dollars a year, and probably adding several thousand R&D heads a year.

[325] So every year our -- the management at Microsoft has to decide where to make that incremental investment. Other jurisdictions compete for our R&D investment. One of the ways they compete is by making it cost attractive in a variety of ways, including offering tax incentives.

[326] Our management is keenly aware that the R&D credit to reduce the cost of our doing research in the United States by about five to 6.5 percent on qualifying expenditures. That's a -- I can tell you that's a big enough number to get the attention of our senior management, all the way to the top.

[327] There's really only one tax issue I get e-mails from my chairman about, making sure it's still around, and that's the R&D credit.

[328] MR. CAPPS: At EDS, the majority of our research is done in the U.S. We have had some pockets -- we acquired a company a number of years ago that had a research group in England, and we've continued that. We did some research through a joint venture up in Canada. Both those jurisdictions have incentives for research that were attractive.

[329] As -- you know, as we go forward, we're in a very competitive, global environment. All these things come into play. You look at, you know, the cost of a labor force, the tax regime -- all those things work into the model as far as where are you going to put various operations, and where you're going to grow.

[330] So far we've been fortunate in being able to maintain the bulk of our R&D here. But that is a growing issue. A lot of countries offer very attractive financial and tax incentives to locate research there.

[331] I think the OECD recently did a study and looked at nine countries and saw the U.S. as third from the bottom as far as the relative incentives it was providing.

[332] MS. EVANS: I wouldn't say we do our R&D in this country because of the credit, because 85 percent of our research and development is done in the United States, and that's a legacy of our starting off in New York with the Watson Laboratory, which is the main laboratory, and it cooperates with our laboratory in Almaden, California; and then there are other labs around the country.

[333] But 85 percent -- over 85 percent of our research and development is done in this country. And the credit -- the fact that it does benefit U.S. research is helpful, but it's not a reason that we do it here in this country.

[334] CHAIR HOUGHTON: Just one final question.

[335] IBM has a large research laboratory in Switzerland. Do you get tax credits in Switzerland for R&D?

[336] MS. EVANS: I don't know the answer to that. I can find that out for you.

[337] CHAIR HOUGHTON: Oh yeah. It's not important.

[338] Okay, well look, thank you very much. We certainly appreciate it.

[339] Meeting adjourned.

[340] [Whereupon, at 11:45 a.m., the proceedings were adjourned.]