Research Tax Credit : Current Status and Selected Issues for Congress (RL31181) / Gary L. Guenther.

Format:

Book

Author/Creator:

Guenther, Gary L., author.

Language:

English

Subjects (All):

Tax credits--United States.

Tax credits.

Income tax deductions--United States.

Income tax deductions.

Physical Description:

1 online resource (34 pages)

Place of Publication:

Washington, D.C., : Congressional Research Service, Library of Congress, 2007.

Summary:

Technological innovation is a major driving force behind long-term economic growth, and research and development (R&D) serves as the lifeblood of innovation. In economies dominated by competitive markets, privately owned firms are responsible for a large share of R&D investment, mainly in a bid to become more competitive and improve their prospects for future growth. Because firms generally cannot capture all the returns to their R&D investments, they are inclined to spend less on R&D than its overall economic benefits would warrant. Partly in a bid to negate this inclination, the federal government supports business R&D in a variety of ways, including a tax credit for increases in R&D spending. This report examines the status of the credit, summarizes its legislative history, discusses some key policy issues it raises, and describes legislation in the 110th Congress to modify or extend it. The report will be updated as legislative activity warrants. The research tax credit has never been a permanent provision of the federal tax code. Since its enactment in mid-1981, the credit has been extended 12 times and significantly modified five times. While the credit is often thought of as a single unified credit, it has five components: (1) a regular credit, (2) an alternative incremental credit (AIRC), (3) an alternative simplified credit (ASIC), (4) a basic research credit, and (5) an energy research credit. All but the energy research credit are incremental in that the credit applies only to qualified research spending above a base amount. The credit is due to expire at the end of 2007. In effect, the research tax credit tries to stimulate increased business R&D investment by reducing the after-tax cost to firms of undertaking qualified research beyond a base amount. A key factor shaping the efficacy of the credit is the sensitivity of firms to changes in the cost of R&D. Although most analysts and lawmakers take a favorable view of research tax credits in general, the design of the current federal credit has long been a target of criticism. A major concern of critics is that the design undermines the credit's efficacy. Critics attribute this reduced effectiveness to what they consider five flaws in the credit's design: (1) a lack of permanence, (2) inadequate and disparate incentive effects, (3) its non-refundable status, (4) an unsettled definition of qualified research, and (5) a failure to target R&D projects that generate much larger social returns than private returns. At least four bills to extend the credit have been introduced in the 110th Congress: S. 41, S. 592, S. 833, and H.R. 1712. More specifically, S. 41 and H.R. 1712 would extend the credit permanently; replace the regular credit, AIRC, and ASIC with a new simplified credit equal to 20% of a firm's qualified research expenses above half of its average qualified research expenses in the three previous tax years; make 80% of contract research expenses eligible for the credit; and simplify the basic research credit. By contrast, S. 592 would extend the current credit through 2012, and S. 833 would extend it permanently.

Notes:

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