Use and Effectiveness of the Research and Experimentation Tax Credit

GAO discussed the research and experimentation tax credit, which allows both individual and corporate taxpayers to reduce their income tax liabilities by a percentage of the amount spent on research and experimentation. GAO stated that the tax credit had been claimed by a wide variety of firms in many sectors of the economy. However, of the total amount of credit claimed in the GAO sample, over half went to 53 large corporations that spent large amounts on research and experimentation. Most of these firms were involved in either high-technology fields or heavy industry. GAO noted that companies applied the tax credit to both new and ongoing research and to both the development of new products and the improvement of existing products. In addition, GAO stated that evidence indicates that the tax credit has met its objective; however, a significant number of the firms contacted by GAO said that the tax credit had not encouraged them to carry out more research than they would have without the tax credit. GAO also noted that the tax credit: (1) will cause the loss of over $7 billion in federal tax revenues; and (2) has caused tax administration problems for the Internal Revenue Service because of ambiguities in regulations which define qualified research. GAO stated that, given that the available information on the tax credit could lead to conflicting conclusions, it could not recommend that the tax credit be made permanent.