The Effectiveness of Research & Experimentation Tax Credits

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US. Congress Office of Technology Assessment, Washington, DC, 1995; Available from Supt. of Documents, PO. Box 371954, Pittsburgh, PA 15250; Tel. (202) 512-1800.

Although an effective policy for stimulating additional R&D on the margin, the Research and Experimentation (R&E) Tax Credit is more of a financial than technology tool, and performs a very different function than direct federal R&D funding, OTA determined shortly before its closing on Sept. 29, 1995. This report analyzes the history and use of the tax credit, which was first enacted in 1981, and outlines potential future policy changes. OTA found that for each dollar of lost tax revenue, the tax credit stimulates an additional dollar of R&D. The policy is generally effective and would be even more effective if the credit were made permanent, OTA concluded. While citing the usefulness of the credit, especially to firms with rapidly expanding R&D outlays, OTA found that the credit is a rather small factor in the overall R&D picture of the United States, representing less than 2 percent of all private-sector R&D spending in 1992. Also, firms that did use the credit tended to be large manufacturing businesses. Companies with over $250 million in assets claimed 70 percent of the credit. …