R&E Tax Credit Growth Outpaced R&D Spending

The yearly dollar amount of research and experimentation (R&E) tax credit claims grew twice as fast as company and other nonfederally funded R&D expenditures between 1990 and 2001, a new National Science Foundation (NSF) InfoBrief reports. In contrast, direct federal funding for industrial R&D declined through much of the 1990s, both in absolute terms and relative to industry-funded R&D.

The InfoBrief considers R&E tax credit data from the U.S. Internal Revenue Service and R&D funding data from NSF's annual Survey of Industrial R&D. For 2001, the latest year for which data are available, U.S. corporate claims for the R&E tax credit totaled approximately $6.4 billion ($6.2 billion in 2000 constant or inflation-adjusted dollars), compared with a high of $7.1 billion in 2000.

The R&E tax credit, established in 1981 as part of the Economic Recovery Tax Act, is one of the nation's better-known policy tools to stimulate company R&D. The credit presently is equal to the sum of 20 percent of the excess of qualified research expenditures for the taxable year over a base amount, and 20 percent of basic research payments. However, legislation introduced earlier this year aims to both expand the tax credit and make it permanent (see the April 18 issue of the Digest).

NSF offers these findings:

• From 1990 to 2001, the average annual growth rate for claims was 11 percent, compared with 5 percent for company-funded R&D expenditures, after adjusting for inflation.
• The number of corporate tax returns claiming the tax credit grew at a slower rate than claims, fluctuating between 8,000 and 10,000 during the 1990s.
• From 1990 to 1996, companies claimed between $1.5 billion and $2.4 billion in R&E tax credits annually; since then, annual claims have exceeded $4 billion.
• R&E tax credit claims accounted for less than 4 percent of industry-funded R&D expenditures, as of 2001.
• Since 1998, corporate tax returns classified in five industries have accounted for 80 percent or more of R&E tax credit claims: computer and electronic products; information, including software; chemicals, including pharmaceuticals and medicines; transportation equipment, including motor vehicles and aerospace; and professional, scientific and technical services, including computer services and R&D services. The same five industries accounted for two-thirds of company-funded R&D expenditures from the NSF Survey of Industrial R&D in 2001.
• Federal funding for industrial R&D is even more concentrated. Three industries - computer and electronic products; professional, scientific and technical services; and transportation equipment ­ accounted for 94 percent of federal funding for industrial R&D in 2001.

NSF notes that its Survey of Industrial R&D is based on a nationally representative sample of all U.S. for-profit companies having five or more employees, with data collected on a calendar-year basis and industry classification based on the North American Industry Standard Classification. The survey is available at http://www.nsf.gov/statistics/industry/.

The NSF InfoBrief, The U.S. Research and Experimentation Tax Credit in the 1990s, is available at http://www.nsf.gov/statistics/infbrief/nsf05316/.