Innovation Policies the 114th Congress Should Consider
In November 2014, the Congressional Budget Office (CBO) presented the incoming members of the 114th Congress with "Federal Policies and Innovation", a report arguing that "market failure" - whereby "[I]nnovation produces some benefits for society from which individual innovators are not able to profit - results in those innovators tending to "underinvest" in such activity. Public policymakers, says the CBO, must "endeavor to promote innovation to compensate for that underinvestment." There are three innovation-related issues which Congress will likely address in this Congress: the re-instatement of the federal R&D tax credit, patent reform, and regulatory reform.
As to the issue of reinstatement of the federal R&D tax credit, which expired in December 2013, this credit resulted in manufacturers taking advantage of $6 billion in tax expenditures in 2012. Support for making the R&D tax credit permanent is virtually universal in the American business community. However, it has never been empirically shown that this R&D tax credit convincingly stimulates additional private sector R&D; a more likely scenario is that it "rewards" companies for engaging in R&D activities they had intended to invest in regardless of the credit's availability. If Congress is to extend the R&D tax credit, a narrower legislative focus on what specific type of R&D activities are eligible may result in more than just a marginal impact on management's R&D decisions (which are ultimately market-driven).
Legislation addressing comprehensive patent reform has already re-emerged in the 114th Congress, with Congressman Bob Goodlatte in February introducing the Innovation Act of 2015 in the House. This Act, targeted at patent assertion entities (PAEs), or patent trolls, who are accused of filing, or threatening to file, dubious patent infringement lawsuits against businesses to "extort" financial remuneration, contains several provisions designed to mitigate the patent troll problem. Yet this legislation, previously passed in December 2013 with bipartisan support in the House, needs to take account of the changes recently taking place in the American patent system, including several recent U.S. Supreme Court decisions making it easier to discourage PAEs meritless claims and defeat their litigation; the results of the new procedures in the America Invents Act of 2011 which allow anyone to challenge patents in a timely, inexpensive proceeding before the Patent Trial and Appeals Board; the adoption by the Judicial Conference of the U.S. of changes to the Federal Rules of Civil Procedure ensuring that patent cases met heightened pleading standards required of all other federal cases; and recent efforts by the Federal Trade Commission and state attorneys general to aggressively use their authority combat abusive patent demand letters generated by PAEs.
The result of a careful review of these patent system interventions may result in a reduction in the scope of the provisions of the Innovation Act, or a targeted legislative approach to changing a system which has generally worked well. An example of the latter approach, focused on PAE behavior, is the "Targeting Rogue and Opaque Letters ("TROL") Act of 2014, which was approved by a bipartisan vote of 13-6 in the House Subcommittee on Commerce, Manufacturing, and Trade in July 2014 but died in the 113th Congress.
The CBO does make constructive suggestions concerning regulatory reform that would promote increased innovation in the U.S. economy. First, by reconsidering federal regulatory goals, such as public safety, and reassessing the way certain risks are balanced against the potential benefits provided by innovation. This "benefit/risk" analysis is long overdue, as inefficient regulation can also create incentives for firms to divert their resources to less promising innovation investments. Furthermore, Congress can review the tools of regulatory policy in certain areas to allow for more flexibility in meeting these regulatory goals, such as relying on prices and the market system to reduce the costs of regulation and promote increased innovation. Lastly, Congress could address liability laws and other regulations promulgated by state and local governments that consider a balance of risks and rewards with innovation and other economic policy goals. Legislation addressing these regulatory challenges can directly improve the innovation environment and competitiveness of American manufacturers.
A more ambitious goal, and one which has eluded several previous Congresses, is the passage of the REINS Act to increase Congressional accountability for, and transparency in, the federal regulatory process by requiring a joint resolution of both chambers of Congress before "major rules" may take effect. Major rules are defined as those rules having an annual estimated impact on the economy exceeding $100 million or imposing more than one million hours of paperwork burden. With both houses of Congress now in Republican-controlled hands, this legislation may have a greater likelihood of passage in Congress (although still facing a potential Administration veto).
