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Chapter 4. Research and Development: National Trends and International Linkages

Federal R&D


The government supports S&T through a number of policy measures, the most direct of which is the conduct and funding of R&D that would not or could not be conducted or financed in the private sector. This section presents data on federally funded R&D activities, on the government's contribution to the U.S. R&D infrastructure, and on federal R&D tax credits, which serve as an indirect means of stimulating R&D in the private sector.

R&D Funding in Current Federal Budget

The budget appropriations for federal spending on R&D in FY 2009 (signed into law in March 2009) totaled $147.1 billion (table 4-7 ), an increase of $3.3 billion, or 2.3%, over the enacted FY 2008 spending level of $143.7 billion. The president's proposed FY 2010 budget includes requests for spending on R&D of $147.6 billion, an increase of $0.6 billion, or 0.4%, over the appropriated FY 2009 level.

In addition, a one-time but sizable increase in budget authority for federal R&D was provided by the American Recovery and Reinvestment Act (ARRA) (Public Law 111-5) in early 2009. In a preliminary estimate (May 2009), the White House's Office of Science and Technology Policy placed the overall increase of federal R&D and R&D infrastructure funding from ARRA at about $18.3 billion in FY 2009 (table 4-7 ).

Adjusted for inflation, the enacted federal budget for FY 2009 represents a 0.8% increase in constant dollars. The increase proposed by the president for FY 2010 represents a constant-dollar decline of 0.6%. The ARRA funding is a sizable increase, whether in current-dollar or inflation-adjusted terms. The overall effects on the growth of federal R&D funding in either year depends on whether added spending under ARRA occurs in FY 2009 or FY 2010.

The largest increases among the agencies in the FY 2009 budget for R&D go to the National Institutes of Health (NIH), with an increase of $1.2 billion; the Department of Energy (DOE), up $814 million; and NSF, up $277 million (table 4-7 ). These same agencies are also major recipients of ARRA funds (table 4-7): $10.4 billion to NIH for added biomedical research and laboratory renovation and construction; $2.9 billion to NSF for increased basic research, education and human resources, research facility construction, and research instrumentation; and $2.4 billion to DOE for new collaborations at the frontiers of energy research and infrastructure investments at the national laboratories. In addition, $925 million goes to the National Aeronautics and Space Administration (NASA) for accelerated activities in earth science climate research missions and the development of a next-generation air transport system. Another $410 million goes to the National Institute of Standards and Technology (NIST) for new standards research, advanced measurement equipment, and construction of research facilities.

The president's FY 2010 proposal for federal R&D notes investment priorities in four main areas, as follows:

  • Sciences for a prosperous America—increased federal support for basic research. This focus recognizes that new fundamental knowledge and technology have often fueled the creation of new industries with associated high-technology and high-wage jobs.
  • A clean energy future—expanded investment in research, development, demonstration, and deployment of clean energy technologies to help reduce U.S. dependence on oil, create green jobs, and limit the impact of climate change. (See sidebar "Public Investment in Energy R&D.")
  • Healthy lives for all Americans—increased funding for biomedical and health research.
  • A safe and secure America—development of better science and technology to improve the prediction and prevention of, and the reaction to, destabilizing or paralyzing natural and man-made threats; improve capabilities for biodefense; and monitor nuclear nonproliferation compliance and prevent the surreptitious entry of weapons of mass destruction (OSTP 2009).

Federal R&D Budget by National Objectives

To assist Congress and the president in evaluating and setting the federal budget and its components, the Office of Management and Budget classifies agency budget requests into specific categories called budget functions. Budget functions represent a wide range of national objectives that the government wants to advance, from defense to health to transportation.

Defense-Related R&D
In the FY 2008 budget, defense was the largest budget function, accounting for $81.1 billion (current dollars), or 59% of the federal R&D budget (appendix table 4-17 ). Nondefense functions totaled $56.9 billion. Defense R&D is supported by DOD, DOE, and the Department of Homeland Security (DHS), with DOD accounting for $78 billion in FY 2008.

The proportional split between defense and nondefense R&D has fluctuated over the past several decades (figure 4-7 ). In FY 1980, federal budget authority for defense-related R&D roughly equaled nondefense R&D. During the next several years, however, defense R&D expanded rapidly. By FY 1985, defense R&D budget authority more than doubled that of nondefense R&D. In contrast, between 1986 and 2001 nondefense surged, and the gap between defense and nondefense R&D budgets shrank almost every year. In FY 2001, the defense budget function represented 53% of the federal R&D budget. The trend reversed yet again after September 11, 2001, as defense R&D became more prominent, accounting for 59% of the federal R&D budget in FY 2008.

Civilian-Related R&D
The most dramatic change in federal R&D priorities over the past 25 years has been the increase in health-related R&D (figure 4-7 ), which rose from 25% of the federal nondefense R&D budget allocation in FY 1980 to 55% in FY 2005. Growth accelerated after 1998, when policymakers set the NIH budget on course to double by FY 2003. In FY 2008, health-related R&D represented 52% of nondefense R&D, even though recent increases have been below the level of inflation.

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. The loss of the Space Shuttle Columbia and its entire crew in February 2003 prompted curtailment of manned space missions. In more recent years, NASA's nondefense R&D budget share has increased, growing from 14% in FY 2005 to 17% in FY 2008. Nearly 58% of NASA's $17 billion budget in FY 2008 was allocated for R&D; adjusted for inflation, the space-related R&D total was higher in FY 2008 than at any time since FY 1999.

Federal nondefense R&D classified as general science had about a 9% share in the mid 1990s, growing to 14% in FY 2008. However, this change reflected chiefly a reclassification of several DOE programs from energy to general science in FY 1998.

With respect to the federal budget for basic research, 94% of the funding in FY 2008 resided in nondefense budget functions (appendix table 4-18 ). In large part, this reflects the budgets of agencies with nondefense objectives such as general science (notably NSF), health (NIH), and space research and technology (NASA). Over the past several years, budget authority for basic research (which is not equivalent to general science R&D) has been flat after adjusting for inflation. In FY 2003, basic research budget authority was $23.8 billion (constant 2000 dollars); in FY 2008, $23.4 billion.


Federal Spending on R&D by Agency

Federal R&D obligations totaled an estimated $114.6 billion in FY 2008 (the most recent year for which complete data are available). An additional $1.8 billion was obligated for R&D plant (facilities and equipment). Federal obligations for R&D have increased annually on a current-dollar basis since the early 1990s, but when adjusted for inflation, the increases flatten out after FY 2005 (appendix table 4-19 ).

More than 20 federal agencies fund R&D in the United States. In FY 2008, seven agencies committed more than $1 billion each for R&D (figure 4-8 ; table 4-8 ; table 4-9 ; appendix table 4-20 ). These agencies accounted for about 96% of total federal R&D obligations that year.

Department of Defense
DOD funds more than half of all federal R&D, having provided an estimated $58.7 billion (51%) in FY 2008. Of this total, $51.8 billion, or 88%, went to development, the majority ($45.8 billion) being allocated for "major systems development," which includes the primary activities for developing, testing, and evaluating combat systems.

Extramural performers received 71% of DOD's R&D obligations ($41.8 billion), the bulk going to industrial firms ($38.6 billion). DOD accounted for about 84% of all federal R&D funding to industry in FY 2008. DOD intramural R&D accounted for 26%, and FFRDC R&D accounted for 3%.

Department of Health and Human Services
The Department of Health and Human Services (HHS) is the primary federal source of funding for health-related R&D. In FY 2008, it obligated an estimated $29.7 billion, or 26% of all federal R&D, most ($28.5 billion) being R&D funding by NIH. HHS R&D funding is almost entirely allocated for research (almost 54% for basic and 46% for applied). Development activities accounted for less than 1% of the HHS total.

Extramural performers accounted for 80% ($23.8 billion) of FY 2008 HHS R&D obligations. Universities and colleges received $17.1 billion; other nonprofit research organizations, $4.4 billion. HHS provided about 67% of all federal R&D funds distributed to universities and colleges in FY 2008 and 74% of federal R&D funds distributed to nonprofit institutions.

Department of Energy
DOE obligated an estimated $8.2 billion to R&D in FY 2008, 7% of the federal R&D total. Research accounted for 76% of these obligations (40% for basic and 36% for applied). FFRDCs received about 66% of DOE R&D obligations. Many of DOE's research activities require specialized equipment and facilities available only at its intramural laboratories and FFRDCs. Accordingly, DOE invests more resources in FFRDCs than other agencies. In FY 2008, DOE funds accounted for 59% of all federal R&D obligations to FFRDCs.

National Aeronautics and Space Administration
NASA obligated an estimated $6.2 billion to R&D in FY 2008, 5% of the federal R&D total. Of this R&D support, 66% funded development activities; 21%, basic research; and 13%, applied research. Extramural R&D (chiefly by industry performers) accounted for 64% of NASA's R&D obligations in FY 2008. Agency intramural activities represented 19%—and FFRDC activities, another 17%—of the NASA R&D total.

National Science Foundation
NSF obligated an estimated $4 billion for research in FY 2008. About 92% of NSF's support funded basic research, and 95% funded extramural performers, chiefly universities and colleges ($3.3 billion). NSF is the federal government's primary source of funding for academic, basic S&E research and the second-largest federal source (after HHS) of R&D funds for universities and colleges.

Department of Agriculture
The U.S. Department of Agriculture (USDA) obligated an estimated $2.4 billion for R&D in FY 2008, with the main focus on life sciences. The agency is also one of the largest research funders in the social sciences, particularly agricultural economics. Of USDA's total obligations for FY 2008, about 64% ($1.5 billion) funded intramural R&D, chiefly the Agricultural Research Service.

Department of Commerce
The Department of Commerce (DOC) obligated an estimated $1.1 billion for R&D in FY 2008, mainly for the R&D activities of the National Oceanic and Atmospheric Administration and NIST. Research accounted for 91% of the R&D for the department as a whole (10% for basic research and 81% for applied research); 78% of the total was for intramural R&D; and almost 22% supported extramural performers, primarily universities and colleges.

Other Agencies
Of the other R&D-funding agencies, eight obligated between $100 million and $1 billion for R&D in FY 2008 (table 4-8 ). This group included the Departments of Transportation, Homeland Security, the Interior, Veterans Affairs, and Education; the Environmental Protection Agency; the Smithsonian Institution; and the Agency for International Development. These agencies also varied with respect to the character of the research and the roles of intramural, FFRDC, and extramural performers.


Federal Spending on R&D by Performer

Academia
The federal government has historically been the primary source of funding for R&D performed by universities and colleges. Federal obligations for academic R&D in FY 2008 totaled an estimated $25.7 billion (current dollars). As figure 4-9 illustrates, federal funding for academic R&D generally has increased over the long term. In FY 1955, federal obligations for academic R&D stood at $0.8 billion in constant 2000 dollars and accounted for 7% of all federal R&D funding. In FY 1985, federal obligations to this sector were $9.4 billion, 13% of all federal R&D funding. The corresponding figures for FY 2008 were $21.5 billion and 23%, respectively.

Federal funding of academic R&D grew rapidly after FY 1998, the result of a successful bipartisan effort to double the budget of NIH from its FY 1998 level over the following 5 years. Since FY 2004, however, federal R&D obligations to universities and colleges have failed to keep pace with inflation. (For additional details on academic R&D, see chapter 5.)

Business
Federal obligations for R&D performed by businesses totaled an estimated $46.0 billion in FY 2008. For decades, the business sector has consistently received the bulk of federal R&D funds (figure 4-9 ).

Space program investments in the 1960s fueled the growth of federal obligations for business R&D, but after the successful Apollo 11 mission to the moon, R&D obligations to industry declined. A decade later, Cold War investments in military technology resulted in a renewed period of growth. Similarly, military investment in the aftermath of September 11, 2001, has increased the flow of federal R&D funding to industry. Adjusting for inflation, federal R&D obligations to industry increased by 42% from FY 2001 to 2008.

The amount of federally funded R&D reported by industry began to diverge from the amount reported by the federal government beginning in FY 1989. For details on this discrepancy, see the sidebar "Tracking R&D: The Gap Between Performer- and Source-Reported Expenditures."

Federal Intramural R&D
Federal obligations for federal intramural R&D totaled an estimated $26.8 billion in FY 2008. These funds supported R&D performed at federal agencies' intramural laboratories, as well as the costs associated with the planning and administration of both intramural and extramural R&D projects.

Among individual agencies, DOD funds the most intramural R&D, having accounted for 56% of all federal obligations for intramural R&D in FY 2008 (table 4-9 ). DOD's intramural R&D obligations are almost three times those of HHS, the second-largest performer of federal intramural R&D. Only two other agencies reported intramural R&D obligations of more than $1 billion in FY 2008: NASA and USDA.

FFRDCs
Unique organizations in the federal R&D system, FFRDCs were established to help the U.S. government meet special long-term research or development needs that could not be met as effectively by existing in-house or contractor resources. They were first established during World War II to assist DOD and DOE with R&D on nuclear weapons. Today, FFRDCs perform R&D for both defense and civilian applications across a broad range of S&E fields. Of the 37 currently active FFRDCs (appendix table 4-22 ), 16 are sponsored by DOE, the most of any federal agency. These 16 organizations accounted for about 69% of the R&D obligations of all FFRDCs combined in FY 2007.

Five FFRDCs reported R&D obligations of more than $600 million in FY 2007: Los Alamos National Laboratory (DOE), Jet Propulsion Laboratory (NASA), Lawrence Livermore National Laboratory (DOE), Sandia National Laboratory (DOE), and Oak Ridge National Laboratory (DOE). These five accounted for 55% of the FFRDC total that year. Los Alamos National Laboratory and Lawrence Livermore National Laboratory are the only two laboratories in the United States where research on the nation's nuclear stockpile is conducted.


Federal Spending on Research by Field

Federal agencies fund research (that is, basic research plus applied research, excluding development) in a wide range of S&E fields, from physics and mathematics to aeronautical engineering to sociology. Furthermore, the share of funding for research differs by field, as do the trends in funding over time.

In FY 2008, an estimated $55.1 billion (48%) of the $114.6 billion for all R&D supported research. Of this total, $29.7 billion (54%) supported research in the life sciences (figure 4-10 ; appendix table 4-23 ). The fields with the next-largest amounts were engineering ($9.4 billion, 17%) and the physical sciences ($5.2 billion, 10%), followed by environmental sciences ($3.3 billion, 6%), and mathematics and computer sciences ($3.3 billion, 6%). The balance of federal obligations for research in FY 2008 supported the social sciences, psychology, and all other sciences ($4.2 billion overall, 8% of the total for research).

HHS, primarily through NIH, accounted for the largest share (54%) of federal obligations for research in FY 2008. Most of this amount funded research in medical and related life sciences. The five next-largest federal agencies for research funding that year were DOD (12%), DOE (11%), NSF (7%), USDA (4%), and NASA (4%).

DOD's research funding emphasized engineering ($3.7 billion), and mathematics and computer sciences ($1.2 billion). DOE provided substantial funding for research in the physical sciences ($2.4 billion) and engineering ($2.2 billion), whereas USDA's research funding was chiefly directed at the life sciences ($1.8 billion). NASA's research funding emphasized engineering ($0.8 billion), followed by the physical sciences ($0.6 billion) and environmental sciences ($0.5 billion). NSF, which has a mission to "promote the progress of science," had a relatively balanced research portfolio, contributing between $0.6 and $0.8 billion to researchers in each of the following fields: mathematics and computer sciences, physical sciences, engineering, environmental sciences, and life sciences.

From 1986 to 2008, real growth in federal obligations for research averaged 3.2% per year, increasing from $23.1 billion in 2000 dollars in FY 1986 to $45.0 billion in FY 2008 (appendix table 4-24 ). The fields that experienced higher-than-average growth during this period were mathematics and computer sciences (5.5% per year in real terms), life sciences (4.8%), and psychology (5.8%). Funding for the remaining fields also grew at a faster rate than inflation over this period: social sciences (1.9%), engineering (1.8%), and environmental sciences (1.3%).


Federal R&D Tax Credits

Background
Contributions of R&D to economic growth and social welfare, along with likely underinvestment by private performers, given the difficulty in fully appropriating R&D benefits, are often cited as reasons for justifying public support for R&D (NRC 2005b).[23] In addition to direct government funding discussed earlier in this chapter, fiscal policy tools used to provide such support include tax incentives.[24] The federal government offers several corporate tax incentives for qualified R&D expenditures including a deduction under Internal Revenue Code (IRC) section 174 (C.F.R. Title 26) and a tax credit under section 41. As of 2006, at least 32 states also offered credits for company-funded R&D (NSB 2008; Wilson forthcoming). This section focuses on business R&D tax credits at the federal level.

The research and experimentation (R&E) tax credit, established by the Economic Recovery Tax Act of 1981 (Public Law 97-34), covers R&D activities performed in the United States by domestic and foreign-owned firms but excludes R&D conducted abroad by U.S. companies. It is subject to periodic extensions and, at the time of writing, was last renewed by the Emergency Economic Stabilization Act of 2008[25] through 31 December 2009.

The R&E tax credit encompasses a regular credit, as well as credits for payments for basic research to qualified universities, scientific research organizations, or grant organizations, and for payments to energy research consortia. Under the regular credit, companies can take a 20% credit for qualified research above a base amount for activities undertaken in the United States (IRC section 41(a)(1)).[26] Thus, the regular credit is characterized as a fixed-base incremental credit. An incremental design is intended to encourage firms to spend more on R&D than they otherwise would by lowering after-tax costs. At the same time, the actual or effective credit rate for corporate taxpayers is lower than 20% because of limitations involving deductions under IRC section 174 (Guenther 2008).[27]

Federal Corporate Tax Credit Claims
According to the IRS Statistics of Income Division (SOI),[28] U.S. companies claimed an estimated $7.3 billion in federal R&E tax credits in 2006, involving close to 11,000 corporate tax returns, compared with $6.4 billion in 2005 (table 4-10 ).[29] The proportion of R&E credits going to corporations with business receipts of $250 million or more has fluctuated narrowly between 75% and 80% since 2003 and was 75% in 2006.[30]

For all industries, the size of R&E claims was about 3.3% relative to company-funded R&D in 2006, a proportion that has changed little in recent years (figure 4-11 ). Appendix table 4-25 and 4-26 show data by NAICS industry up to 2005 (latest available year by detailed industry). Five industries accounted for about three-quarters of R&E credit claims in 2005. These industries had much higher ratios of R&E claims to industry-funded R&D: computer and electronic products (26%); chemicals, including pharmaceuticals and medicines (18%); transportation equipment, including motor vehicles and aerospace (13%); information, including software (10%); and professional, scientific, and technical services, including computer and R&D services (10%). The same five industries accounted for 80% of 2005 company-funded R&D from the NSF/Census Survey of Industrial Research and Development.[31]

Notes

[23] Support for private R&D can be studied along several dimensions, including the immediate effect in stimulating R&D relative to costs (e.g., tax expenditures [forgone public revenues]) and administrative expenses), longer-term impacts (e.g., growth and employment), and relationship to other policy tools. See Atkinson (2007) and Tassey (2007) for recent discussions on the U.S. tax credit, Wilson (forthcoming) and Wu (2004) for empirical studies on state R&D credits, and Bloom, Griffith, and Van Reenen (2002) and OECD (2003) for country-level empirical studies on the effectiveness of R&D tax credits.
[24] Tax incentives include tax allowances, exemptions, or deductions (reductions in taxable income) and tax credits (reductions in tax liability). Each of these tax incentives may be designed with different features, such as eligibility criteria, allowable expenses, and level versus incremental bases (OECD 2003).
[25] H.R.1424, Public Law No. 110-343 (Division C, Title III, Section 301).
[26] Qualified R&D costs include company-funded expenses for wages paid, supplies used in the conduct of qualified research, and certain contract expenses. For tax purposes, R&D expenses are restricted to the somewhat narrower concept of R&E expenditures. Qualified expenses must satisfy tests involving the experimental and technological nature of activities (26 CFR 1.41-2). Research in the social sciences or humanities is excluded. See NSF/SRS (2006) for details.
[27] One of two forms of alternative credit formulas may be used in lieu of regular credit provisions: an alternative incremental R&E tax credit (AIRC), enacted in 1996, and a simplified alternative credit (ASIC), established in 2006. Companies may select only one of these three credit types on a permanent basis unless the IRS authorizes a change. The 2008 bill extending the overall R&E credit increased the statutory rate for the ASIC from 12% to 14% and repealed the AIRC for the 2009 tax year only (Guenther 2008).
[28] The target population for SOI's corporate statistics consists of returns of active corporations required to file one of nine 1120 IRS tax forms, where corporations refers to for-profit corporations, joint-stock companies, and certain unincorporated associations. Estimates on corporate tax statistics are based on a stratified probability sample of unaudited active returns. Active returns include returns having current income or deductions. IRS data are for tax years, which cover accounting periods ending any month between July of the calendar year of reference through June of the following calendar year. Estimates are subject to sampling and nonsampling errors. For SOI statistical methodology, see section 3 in IRS (2009).
[29] Actual credit amounts are lower than claims because of limits on overall or general business credits. Corporations requesting the R&E credit must complete IRS Form 6765 (the latest form is available at http://www.irs.gov/pub/irs-pdf/f6765.pdf). SOI tax credit estimates reported in this section cover only C corporations. In particular, data excludes pass-through entities (those that pay little or no federal income tax at the corporate level but are instead required by law to pass any profits or losses to their shareholders, where they are taxed at the individual rate) such as S corporations (IRS form 1120S), real estate investment trusts (1120-REIT), and regulated investment companies (1120-RIC).
[30] See figure C in http://www.irs.gov/taxstats/article/0,,id=164402,00.html (accessed 19 June 2009). This source also has data by type of R&E credit and related IRS/SOI publications.
[31] See appendix table 4-12. Although both IRS and NSF/Census statistics use NAICS as the underlying industry classification system, comparisons of R&D-related estimates at the industry level are problematic because of differences in classification and company consolidation procedures. For example, industry codes for tax purposes are based on gross receipts, whereas the classification in the NSF/Census survey is based on dollar payrolls.
 

Science and Engineering Indicators 2010   Arlington, VA (NSB 10-01) | January 2010

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