Editor’s note: James Gattuso is a research fellow in regulatory policy at The Heritage Foundation. He wrote this for the Competitive Enterprise Institute.

WASHINGTON,Should the federal government tax innovation?

Judging by the pro-technology rhetoric of nearly every politician above the rank of dogcatcher, one would think the idea a non-starter. Better to tax motherhood and apple pies first. Yet, just such a tax exists, under the guise of fees paid by inventors to the U.S. Patent and Trademark Office (PTO), and diverted to other programs.

The tax this year could be several hundred million dollars, for a total of over a billion since 1992. That’s less than the rounding error for the total federal budget, but enough to cause howls of protest from the inventor community. The tax is being challenged on a number of fronts.

Last week, the U.S. Court of Federal Claims heard arguments in a class action suit claiming the annual diversion of funds is unconstitutional. While that case is considered a long shot, the Bush Administration is also reviewing the practice … as part of its review of PTO’s budget request … with OMB director Mitch Daniels expected to make a decision by early December. What he decides will say a lot about the Administration’s commitment to innovation and the technology sector.

The Patent and Trademark Office is one of the U.S. government’s oldest agencies, celebrating its 200th anniversary last month. And unlike many of its younger peers, the agency actually serves a useful purpose…issuing some 175,000 patents annually. Also unlike most of its peers, the agency receives no taxpayer dollars. It is funded entirely through fees paid by patent and trademark applicants.

Patent process is slowing

For the past 10 years, however, these fees have outstripped PTO spending. For fiscal 2003, the agency is projected to collect $1.527 billion in fees. The Administration’s 2003 budget, however, provided for only $1.365 billion in spending. The remaining $162 million would be diverted for other federal spending. The Senate has already marked up the PTO’s budget and has provided for an estimated net diversion of $341 million. The House has yet to perform a mark-up. Whatever the exact final number, the result is that since 1992 around a $1 billion worth of fees paid by America’s inventors has been or will be sluiced off to pay for other federal activities, ranging from farm subsidies to military bands.

To add insult to inventor injury, PTO’s patent approval process is slowing down. It now takes some 26 months to get a patent, up from 18 months a decade ago. PTO and most applicants agree that this is just too slow for today’s fast-moving technology landscape. To speed things up, PTO has proposed increasing its patent fees by some 20 percent.

Are the higher fees necessary? That’s unclear. Anyone who’s been in Washington for more than a long weekend would be skeptical of agencies’ claims that they need more money. Still, given the increasing patent workload, additional resources may be necessary to ease the patent bottleneck. But inventors simply shouldn’t be asked to pay more until and unless all the money goes to the job at hand: processing and granting patent and trademark applications

Despite the pending court case, this probably isn’t a constitutional issue — the Constitution doesn’t ban a tax on innovation. That leaves Mitch Daniels and OMB as the inventors’ best hope. It’s also an opportunity for the Bush Administration — a simple and sensible way to show its commitment to removing government barriers to high technology. The question is: will they seize it?

CEI: www.cei.org