Tax Policy

In 1991, Congress enacted the research and experimentation tax credit to encourage businesses to do research. GAO estimates that the pharmaceutical industry earned $1.24 billion worth of these tax credits between 1981 and 1990. The industry's credits as a share of the credits earned by all industries rose from four percent in 1981 to 12 percent in 1990. These credits were earned primarily by large companies--those with assets of $250 million or more. The biotechnology sector benefitted very little from the tax credit. The research and experimentation tax credit is difficult for the Internal Revenue Service (IRS) to administer because (1) auditors have to distinguish stages of research, (2) audit issues are often highly technical, and (3) successive proposed regulations cause uncertainty.

GAO found that: (1) between 1981 and 1990, the pharmaceutical industry's share of research tax credits increased by 12 percent and totalled $1.24 billion; (2) large pharmaceutical companies with assets of $250 million or more are the primary beneficiaries of research tax credits; (3) although small biotechnology companies invest more of their resources in research and development than large companies, they do not have sufficient tax liabilities to benefit from the tax credit; (4) the research tax credit is difficult for IRS to administer because auditors cannot adequately distinguish research stages, audit issues are often highly technical, and proposed regulations are confusing; and (5) although Treasury plans to clarify and finalize tax credit regulations, the regulations are not expected to distinguish between research for product innovation and research for product development.