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- R&D by Federal Agency
- Federally Funded R&D by Performer
- Federal Research Funding by Field
- Federal R&D Budget by National Objective
- Federal R&E Tax Credit
In the president's 2006 budget submission, the federal government is slated to invest $132.3 billion in R&D, amounting to 13.6% of its discretionary budget (i.e., that part of the annual federal budget that the president proposes and Congress debates and sets). The current level of federal investment in R&D, both in absolute terms and as a share of the budget, is over an order of magnitude greater than what it was prior to World War II, when the government had no unified national agenda for supporting science. In its early days, the U.S. government fostered innovation primarily through intellectual property protection and relatively small investments in R&D, but World War II changed how the federal government viewed its role in the national R&D enterprise. During the war, penicillin, a new drug at the time, greatly reduced the number of deaths caused by infection among Allied forces. And advances in military research, such as radar, were critical contributors to the Allied victory. Recognizing these achievements, President Franklin D. Roosevelt wrote to Vannevar Bush, the wartime director of the Office of Scientific Research and Development, requesting recommendations for how science could be mobilized in times of peace as it was in times of war, specifically "for the improvement of the national health, the creation of new enterprises bringing new jobs, and the betterment of the national standard of living" (Roosevelt 1944). Vannevar Bush's response in 1945, a report entitled "Science—The Endless Frontier," provided a framework for a more active federal role in support of science. He argued that:
There are areas of science in which the public interest is acute but which are likely to be cultivated inadequately if left without more support than will come from private sources. These areas—such as research on military problems, agriculture, housing, public health, certain medical research, and research involving expensive capital facilities beyond the capacity of private institutions—should be advanced by active Government support…[W]e are entering a period when science needs and deserves increased support from public funds. (Bush 1945)
Bush's report was enormously influential, and many of its principles, including the importance of government support for R&D and of maintaining freedom of scientific inquiry, are evident in today's federal science policy and institutions.
Richard Nelson (1959) and Kenneth Arrow (1962) formalized the economic argument that the private sector generally invests less than the socially optimal amount in R&D. Briefly, the argument is that knowledge, the primary output of R&D, is nonrival and partially nonexcludable. That is, knowledge can be used by any number of actors at one time, and it is difficult or impossible to exclude others from using it. This being the case, firms will only invest in those R&D projects from which, through secrecy, patents, or some other means, they are able to recoup their investment plus an acceptable profit. The government endeavors to correct this market failure through a number of policy measures, the most direct of which is the funding and performance of R&D that would not, or could not, be financed or performed in the private sector. This section presents data on such R&D funding and performance as well as on the federal R&D tax credit, an indirect means of stimulating R&D in the private sector.
Federal agencies are expected to obligate $106.5 billion for R&D support in FY 2005. Although more than 25 agencies report R&D obligations, the 5 largest R&D-funding agencies account for 94% of total federal R&D. These agencies vary considerably in terms of their R&D funding strategies, processes, and procedures, reflecting the unique mission, history, and culture of each.
Department of Defense
According to preliminary data, DOD will obligate $51.4 billion for R&D support in FY 2005. DOD funds more R&D than any other federal agency, representing 48% of all federal R&D obligations. More than 88% of these funds ($45.7 billion) will be spent on development, with $39.6 billion slated for major systems development (figure
Department of Health and Human Services
HHS, the primary source of federal health-related R&D funding (largely through the National Institutes of Health), will obligate the second largest amount for R&D in FY 2005 at $28.9 billion, representing 27% of all federal R&D obligations. In contrast to DOD, HHS will allocate most of its R&D funding ($15.2 billion) for basic research. In FY 2005, HHS is expected to provide universities and colleges, the primary recipients of HHS funding, with $16.0 billion, which represents 67% of all federal R&D funds obligated to universities and colleges (table
National Aeronautics and Space Administration
The third largest agency in terms of R&D support is NASA, with R&D obligations expected to total $8.1 billion in FY 2005. Over one-third ($2.9 billion) of NASA's R&D activity is in development, much of which relies on industrial performers similar to those funded by DOD. However, unlike the industrial R&D funded by DOD, the majority (69%) of that funded by NASA supports research projects (basic and applied) as opposed to development. NASA is also the primary sponsor of R&D projects at nine federal facilities (including the Ames Research Center in California's Silicon Valley and the Marshall Space Flight Center in Huntsville, Alabama) and one FFRDC, the Jet Propulsion Laboratory, administered by the California Institute of Technology.
Department of Energy
Of the large R&D-funding agencies, the Department of Energy (DOE) relies the most on the R&D capabilities of FFRDCs. In FY 2005, DOE obligated 60% of its estimated $8 billion in R&D funding to FFRDCs. Of the 37 FFRDCs, DOE sponsored 16 and accounted for 59% of all federal R&D obligations to FFRDCs in FY 2005. Due to the scale and complexity of its research projects, most of DOE's research can only be performed in its intramural laboratories and FFRDCs. (See sidebar "Rationales for Federal Laboratories and FFRDCs.")
National Science Foundation
NSF is the federal government's primary source of funding for general S&E R&D and is expected to fund $3.8 billion of R&D in FY 2005. Of these funds, 94% are for basic research. NSF is the second largest federal source of R&D funds to universities and colleges; $3.2 billion is slated for academic researchers in FY 2005. In 2005, 73% of NSF's basic and applied research funding was allocated using competitive merit review processes with external (peer) evaluations. Most of its remaining research funding was allocated using competitive merit review processes with internal (program) evaluations.
DOD, HHS, NASA, DOE, and NSF are expected to account for 94.1% of all federal R&D obligations in FY 2005 and slightly higher shares of federal obligations for basic research (94.5%) and development (98.8%). The remaining federal R&D obligations come from a variety of mission-oriented agencies such as the Department of Agriculture (USDA), the Department of Commerce (DOC), and the Department of the Interior (DOI). Unlike the larger R&D-funding agencies, USDA, DOC, and DOI direct most of their R&D funds to their own laboratories, which are run by the Agricultural Research Service, the National Institute for Standards and Technology (NIST), and the U.S. Geological Survey, respectively.
Federal Funding to Academia
The federal government has historically been the primary source of R&D funding to universities and colleges, accounting for as much as two-thirds of all academic R&D funding in the early 1980s. (For more detailed information on academic R&D, see chapter 5). In 1955, obligations for academic R&D accounted for 7% of all federal R&D funding, or $0.75 billion in constant 2000 dollars. Fifty years later, R&D funding to academia represents 22% of all federal R&D obligations, or $21.65 billion in constant 2000 dollars. As figure
Federal Funding to Industry
Since 1956, the federal government has obligated the largest share of its R&D funding to industry. Federal funding for this sector, largely for development projects, has experienced more variability over the past 50 years than for any other sector (figure
Federal Intramural R&D
In FY 2005, obligations for federal intramural R&D totaled $24.8 billion. These funds supported R&D performed at federal laboratories as well as costs associated with the planning and administration of both intramural and extramural R&D projects. Among individual agencies, DOD continued to fund the most intramural R&D and is expected to account for almost half of all federal obligations for intramural R&D in FY 2005 (table
Federally Funded Research and Development Center
FFRDCs are unique organizations that help the U.S. government meet special long-term research or development goals that cannot be met as effectively by inhouse or contractor resources. (See sidebar, "Rationales for Federal Laboratories and FFRDCs.") According to the Federal Register, an FFRDC is required "to operate in the public interest with objectivity and independence, to be free from organizational conflicts of interest, and to have full disclosure of its affairs to the sponsoring agency" (National Archives and Records Administration [NARA] 1990). First established during World War II to assist DOD and DOE with R&D on nuclear weapons, FFRDCs today perform R&D with both defense and civilian applications.
Of the 36 FFRDCs active in 2003, DOE sponsors 16, or more than any other agency. These 16 FFRDCs performed a total of $9.2 billion of R&D in 2003, or more than three-quarters of that performed by all FFRDCs combined (appendix table
Federal agencies fund research in a wide range of S&E fields, from aeronautical engineering to sociology. The relative amount of research funding differs by field, as do trends in funding over time. According to preliminary estimates, federal obligations for research (excluding development) totaled $54.7 billion in FY 2005. Life sciences received the largest portion of this funding (54%, or $29.7 billion), followed by engineering (17%), physical sciences (10%), environmental sciences (7%), and mathematics and computer sciences (5%) (figure
HHS, primarily through NIH, provided the largest share (53%) of all federal research obligations in FY 2005, with most of its obligations funding medical and other related life sciences. The next four largest federal agencies in terms of research funding in FY 2005 were DOE (11%), DOD (10%), NASA (10%), and NSF (7%). DOE provides substantial funding for research in the physical sciences ($2.3 billion) and engineering ($2.0 billion). DOD's research funding is focused on engineering ($3.0 billion) and on mathematics and computer sciences ($0.8 billion). NASA's research funding also emphasizes engineering ($2.4 billion), followed by environmental sciences ($1.2 billion) and physical sciences ($1.1 billion). NSF, whose mission is to "promote the progress of science," has a more balanced research portfolio, contributing between $0.6 and $0.8 billion to researchers in each of the following groups of fields: mathematics and computer sciences, physical sciences, environmental sciences, engineering, and life sciences.
Federal obligations for research have grown at different rates for different S&E fields, reflecting changes in perceived public needs in those fields, changes in the national resources (e.g., scientists, equipment, and facilities) that have been built up in those fields over time, as well as differences in scientific opportunities across fields. Over the period 1984–2005, total federal research obligations grew, on average, 3.9% per year in real terms, from $22.2 billion in 2000 dollars to $49.5 billion in 2000 dollars. The groups of fields that experienced higher-than-average growth over this period were mathematics and computer sciences (6.7% per year in real terms), life sciences (5.7%), and psychology (6.7%) (appendix table
Caution should be employed when examining trends in federal support for more detailed S&E fields than those presented above because federal agencies classify a significant amount of R&D only by major S&E field, such as life sciences, physical sciences, or social sciences. In FY 2003, for example, 15% of the federal research obligations classified by major S&E field were not subdivided into detailed fields. This was less pronounced in physical sciences and in mathematics and computer sciences, in which all but 9% of the research dollars were subdivided. It was most pronounced in engineering and social sciences, in which, respectively, 35% and 62% of federal research obligations were not subdivided into detailed fields (appendix table
Before any agency can obligate funds for R&D, it must first have budget authority from Congress for such activity. In the president's FY 2006 budget submission to Congress, the proposed total federal budget authority for R&D is $127.5 billion. Adjusting for inflation, this amount is a 2% decline from the prior year's budget. This decline follows a 5-year period of increasing inflation-adjusted federal R&D budgets. Although R&D tends to be a popular budgetary item, the growing federal budget deficit may hamper future growth in federal R&D.
To assist Congress and the president in evaluating and adjusting the federal budget, OMB requests agencies to allocate their budget requests into specific categories called budget functions. These budget functions represent a wide range of national objectives the government aims to advance, from national defense to health to transportation. Changing trends in federal R&D budget authority by budget function tend to reflect shifts in presidential and congressional priorities (see sidebar "Federal R&D Initiatives").
The largest R&D budget function in the FY 2006 budget is defense, with a proposed budget authority of $74.8 billion, or 59% of the entire federal R&D budget. In 1980 the federal budget authority for defense-related R&D was roughly equal to that for nondefense R&D, but by 1985 defense R&D had grown to more than double nondefense R&D (figure
As described earlier, the majority of defense-related R&D goes toward the development of new and improved military technology, from weapons systems to communication technology. In FY 2006, DOD requested research, development, testing, and evaluation budgets in excess of $1 billion for four systems (US DOD 2005):
- Missile Defense ($8.1 billion): "A multilayer, multifaceted program designed to protect the United States, our Allies and deployed forces from missile attack."
- Joint Strike Fighter ($4.9 billion) : "The Joint Strike Fighter (JSF) is the next-generation strike fighter for the Air Force, Marine Corps, Navy, and U.S. allies."
- Future Combat System ($3.4 billion): "The FCS [Future Combat System] R&D program will develop network centric concepts for a multi-mission combat system that will be overwhelmingly lethal, strategically deployable, self-sustaining and highly survivable in combat through the use of an ensemble of manned and unmanned ground and air platforms."
- DD(X) Destroyer ($1.1 billion): "DD(X) will be an optimally crewed, multi-mission surface combatant designed to fulfill volume firepower and precision strike requirements."
R&D accounts for 13.3% of the FY 2006 federal non-defense discretionary budget authority of $398.5 billion. Although this is less than that reserved for defense activities (16.9% of the $441.8 billion discretionary budget authority in FY 2006), over 90% of federal basic research funding is for nondefense budget functions, accounting for a large part of the budgets of agencies with nondefense missions such as general science (NSF), health (NIH), and space research and technology (NASA) (table
The most dramatic change in national R&D priorities over the past 25 years has been the growing importance of health-related R&D. As illustrated in figure
The budget allocation for space-related R&D peaked in the 1960s, during the height of the nation's efforts to surpass the Soviet Union in space exploration. Since the loss of the Space Shuttle Columbia and its crew of seven on 1 February 2003, manned space missions have been curtailed. Nonetheless, the proportion of the federal R&D budget for space research is slightly higher in 2006 (15.3%) than in 2003 (14.9%). In the president's FY 2006 budget, 54% of NASA's $16.5 billion discretionary budget was allocated for R&D.
Compared with that of health-related R&D, the budget allocation for general science R&D has grown relatively little in the past 25 years. In fact, the growth in general science R&D is more the result of a reclassification of several DOE programs from energy to general science in FY 1998 than the result of increased budget allocations (figure
Alternative concepts have been used to isolate and describe fractions of federal support that could be associated with scientific achievement and technological progress. In a 1995 report, a National Academy of Sciences (NAS) committee proposed an alternative method of measuring the federal government's S&T investment (NAS 1995). According to the committee members, this approach, called the federal science and technology (FS&T) budget, might provide a better way to track and evaluate trends in public investment in R&D. The FS&T concept differed from the traditional federal R&D data definitions used earlier in this section in that it did not include major systems development supported by DOD and DOE, and it contained not only research but also some development and some R&D plant.
Beginning with the FY 2000 budget, OMB has presented its concept for an FS&T budget (figure
In the 2006 Budget of the United States, OMB's FS&T budget is less than half the total federal R&D budget because it excludes funding for defense development, testing, and evaluation. It includes nearly all budgeted federal support for basic research in FY 2004, more than 80% of federally supported applied research, and about half of federally supported nondefense development.
As shown in figure
One of the better-known indirect federal incentives for fostering industrial R&D is the research and experimentation (R&E) tax credit. The traditional justification for incentives for research is that results from these activities, especially more basic or long-term research, are often hard to capture privately because others might benefit directly or indirectly from them. Therefore, businesses might engage in levels of research below those that would be beneficial to the nation as a whole. Across advanced economies, R&D tax credits vary in terms of how they are structured or targeted, their effect on public budgets, and their effectiveness in stimulating innovation (Bloom, Griffith, and Van Reenan 2002; OECD 2003).
The federal R&E tax credit was established by the Economic Recovery Tax Act of 1981, one of several policy tools put in place in the 1980s to address perceived problems in the competitive position of U.S. companies (Guenther 2005). The credit is subject to periodic extensions given its temporary status. It was renewed most recently by the Working Families Tax Relief Act of 2004 through 31 December 2005.
The credit is designed to stimulate company R&D over time by reducing after-tax costs. Specifically, companies that qualify for the credit can deduct or subtract from corporate income taxes an amount equal to 20% of qualified research expenses above a base amount. For established companies, the base amount depends on historical expenses over a statutory base period relative to gross receipts, whereas startup companies follow other provisions. An alternative R&E credit has been available since 1996. This credit has a lower base amount and a maximum statutory rate of 3.75%. The alternative credit benefits established companies that have smaller annual increases relative to their base period (Hall 2001). Companies may select only one of these two credits on a permanent basis, unless the Internal Revenue Service (IRS) authorizes a change. Both types of R&E credit include provisions for basic research payments to qualified universities or scientific research organizations.
Tax Credit Claims
According to data from the IRS' Statistics of Income (SOI), R&E tax credit claims reached an estimated $6.4 billion in 2001 ($6.2 billion in constant or inflation-adjusted dollars), compared with the all-time high of $7.1 billion in 2000 (table
Data are available on the industry classification of companies that claim the R&E tax credit for 1998–2001 using the new North American Industry Classification System (NAICS) -(appendix table
- Computer and electronic products (26%)
- Information, including software (16%)
- Chemicals, including pharmaceuticals and medicines (16%)
- Transportation equipment, including motor vehicles and aerospace (12%)
- Professional, scientific, and technical services, including computer services and R&D services (10%)
The number of corporate tax returns claiming the R&E tax credit grew at a slower rate than their dollar R&E credit claims, fluctuating between 8,000 and 10,000 tax returns over most of the 1990s (table
 DOD reports development obligations in two categories: advanced technology development, which is similar in nature to development funded by most other agencies, and major systems development, which includes demonstration and validation, engineering and manufacturing development, management and support, and operational systems development for major weapon systems.
 In 2005, 73% of all federal research funding was allocated through competitive merit review processes. Fifteen percent was merit reviewed, but competition was limited to a select pool of applicants such as federal laboratories or FFRDCs. Seven percent was awarded to performers for inherently unique research without competitive selection. The remaining 4% was allocated to specific performers at the request of Congress (U.S. OMB 2005).
 Since 2003 one new FFRDC has been established: the Homeland Security Institute in Arlington, Virginia.
 Most of the $2.5 trillion federal budget is reserved for mandatory items such as Social Security, Medicare, pension payments, and payments on the national debt. See appendix table
 For tax purposes, R&D expenses are restricted to the somewhat narrower concept of research and experimental (R&E) expenditures. Such expenditures are limited to experimental or laboratory costs aimed at the development or improvement of a product in connection with the taxpayer's business. Furthermore, the R&E tax-credit applies to a subset of R&E expenses based on additional statutory requirements. See Section 41 of the U.S. Internal Revenue Code (U.S. Code of Federal Regulations, Title 26). For further details on the R&E tax credit and a separate tax R&E incentive, the R&E tax expensing allowance, see NSF/SRS (2005) and references therein.
 Both indirect incentives and direct federal funding are federal expenses. Tax incentives generate tax expenditures: government revenue losses due to tax exclusions or deductions. For estimates of tax expenditures arising from the R&E tax credit, see OMB (2005).
 Public Law No. 108-311, Title III, Section 301. The R&E tax credit was not in place for activities conducted from July 1995 to June 1996.
 The effective rate is considered to be lower than this statutory rate due in part to limitations involving other business credits and allowances.
 Exclude data from IRS tax forms 1120S (S corporations), 1120-REIT (Real Estate Investment Trusts), and 1120-RIC (Regulated Investment Companies). The latest available data for R&E claims at the time of this writing were for 2001.