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Treasury Estimates $10 Billion in R&D Could Be Supported by Permanent Research Credit

April 06, 2011

Expanding the federal research tax credit and making it permanent could help generate $10 billion per year in research activity, according to a report from the U.S. Department of Treasury's Office of Tax Policy. Treasury also suggests that the enhanced credit could expand use of the credits, which already generate a one-to-one match in research spending and help support almost one million jobs. The current credit, which has been reauthorized temporarily 14 times since its introduction in 1981, is set to expire at the end of the year. Recently, a bipartisan group of House members began advocating for expanded, permanent credits, a policy that the Obama administration has incorporated into its last two budget proposals. The current budget debate, however, could derail that effort since the credits would cost the federal government an estimated $106 billion in tax revenue over the next ten years.

In tax year 2008, the most recent year for which data is available, 12,736 corporations claimed $8.3 billion in research credits. Individual taxpayers claimed another $463 million in credits. The manufacturing sector made the most use of research credits that year, filing 46.2 percent of all returns claiming the credits and receiving 69.3 percent of the total dollar amount. Within that sector, most research credit dollars went to firms in the computer and electronic product manufacturing industry, chemical manufacturing and transportation equipment manufacturing. Outside of manufacturing, the professional, scientific and technical services sector filed 30.9 percent of returns and received 9.5 percent of total dollars. The information sector filed 8.9 percent of returns and received 11.4 percent of dollars.

Approximately 70 percent of the research costs that qualify for the credits are labor costs. Many of these research jobs are high-tech and pay higher wages than average. In the report, Treasury argues that by using temporary extensions, the credit's potential economic impact has been needlessly limited. Making the tax credit permanent would reduce uncertainty and help companies and investors plan for long-term research projects and increase overall research spending.

The current tax credit offers two different formulas for calculating the amount for which a taxpayer can file. The "regular" research credit is a 20 percent credit for spending over a different base amount that is determined by the firm's research intensity between 1984 and 1989. There is also a "simplified" 14 percent credit for research spending that exceeds 50 percent of the average qualified research expenses for the three preceding years.

Treasury suggests that this formulation is grossly outdated and should be revamped as the research credit is made permanent. The proposed legislation would increase the simplified credit to 17 percent of expenses over the base amount. This move would encourage firms to switch to the simplified formulation, and would give a more accurate accounting of research expenditures.

Read "Investing in U.S. Competitiveness: The Benefits of Enhancing the Research and Experimentation (R&E) Tax Credit" at: http://www.treasury.gov/resource-center/tax-policy/Documents/Research%20and%20Experimentation%20report%20FINAL.PDF

r&d, tax credits, federal agency, manufacturing, policy recommendations