Chapter 4: Science & Engineering Indicators 93
R&D Tax Credits
In addition to direct financial R& D support, the government has tried to stimulate corporate spending indirectly by offering tax credits on incremental research and experimentation (R& E) expenditures. (Click here for footnote 57.) The credit was first put in place in 1981 and has since
been renewed six times--most recently, through the end
of June 1995. (Click here for footnote 58.) Although the computations are complicated,
the tax code provides for a 20-percent credit for the amount by which a company's qualified R& D exceeds a certain threshold. (Click here for footnote-59.) The Tax Reform Act of 1986 allowed companies to claim a similar credit for basic research grants, contributions, and contracts to universities and other qualifying nonprofit institutions; this credit also is in
effect through mid-1995.
As part of the federal budget process, the Treasury Department annually calculates estimates of foregone tax revenue ("tax expenditures") due to preferential tax provisions, including the R& E tax credit. As one measure of budgetary effect, the
Treasury provides outlay-equivalent figures: These allow a comparison of the cost of this tax expenditure with that of a direct federal R& D outlay. (See "Definitions.") Between 1981 and 1992, more than $20 billion
was provided to industry through this indirect means of federal R& D support-an amount equivalent to about 3 percent of direct federal R& D support. (See appendix table 4-25.) In general, based
on data available through the mid-eighties, the companies that took the most advantage of the credit were large firms that produce scientific instruments, office and computing machinery, chemicals, and electrical equipment (GAO 1989). (Click here for footnote 60.)
Footnote 57:
Not all R& D is eligible for this credit, which is limited to expenditures on laboratory or experimental R& D.
Footnote 58:
Reflecting the tentative political support afforded the credit since its inception, it was allowed to expire on June 30, 1992. After more than one year in limbo, the credit was extended by the Omnibus Reconciliation Act of 1993 for 3 years
retroactive to July 1992.
Footnote 59:
The complex base structure for calculating a company's qualified R& D spending was put in place by the Omnibus Budget Reconciliation Act of 1989. With various exceptions, a company's qualifying threshold was the product of a fixed-base percentage
multiplied by the average amount of the company's gross receipts for the 4 preceding years. The fixed-base percentage was the ratio of R&E expenses to gross receipts for the 1984-88 period. Special provisions cover start-up firms.
Footnote 60:
In an early assessment of the tax's effect on R&D spending, Cordes (1989) found conflicting evidence: Studies based on corporate tax returns and on aggregate time series modeling indicated significant
stimulatory effects; considerably more moderate results were indicated from studies based on company-specific time-series analyses, industry questionnaire responses, and evidence from other countries. In contrast Hall
(1992) using more recent and extensive publicly available company specific data on R& D spending concludes that the tax credit has had its intended effect although it took several years for the firms to fully adjust R& D spending
patterns to take advantage of opportunities provided by the credit. She estimates that the amount of additional R& D spending induced by the credit was twice the cost in foregone tax revenue.
Whatever its ultimate impact on R&D spending, the tax credit has certainly influenced spending less than had it been less subject to erratic legislative treatment. The tax credit has had to be repeatedly (almost annually) renewed, its calculation
provisions have changed considerably over the years, and it was even allowed to lapse for more than a year--all of which circumstances created considerable uncertainty for businesses that would otherwise have planned to take the credit.
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