Following the recent defeat of a bill that would have renewed tax breaks for research and development, manufacturers and trade groups are now pressing federal lawmakers to reinstate the incentive.

Earlier this month, the Senate failed to pass a renewal of the credit, which was added
to a controversial bill to boost the minimum wage and cut the estate tax.

The credit, which applies only to companies that perform R&D in the U.S., expired at the end of 2005 -- the 12th time it has lapsed since being created in 1981.

"For small companies, it's more difficult to deal with prolonged gaps in the credit, because it can have a much bigger impact on cash flow," said Karen Myers, the co-chairwoman of the R&D Credit Coalition, which represents several thousand U.S. businesses.

Of the 16,000 companies that claim the credit, a full 25% have assets below $1 million, a recent coalition study showed.

In 2003, the U.S. spent 2.6% of total gross domestic product on research and development, according to the Organization of Economic Co-operation and Development.

In a June letter to the Senate's Republican and Democratic leadership signed by several dozen manufacturing associations -- from the Aerospace Industries Associations of America to the National Tooling & Machining Association -- industry leaders said the eight-month lapse is already "affecting market expectations and leaving many companies with unexpected shortfalls."

They said a prolonged gap in tax incentives could push companies to move their R&D initiatives overseas. 

According to the National Association of Manufacturers, a Washington-based trade group, productivity in the manufacturing sector has increased by some 60% over the past 20 years "primarily because of innovation and technological advances."

About 75% of the money saved by the tax break goes back into salaries for employees engaged in research and development, the group said. 

Myers said she expects lobbying efforts to pick up strength when Congress returns from the summer break after Labor Day.