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General Government: Research Tax Credit

Opportunities exist to improve targeting of the $6 billion research tax credit and reduce forgone revenue.


Congress could eliminate the regular credit and add a minimum base amount (equal to 50 percent of a taxpayer’s current spending) to the method for computing the alternative simplified credit (ASC).


No legislative action has been enacted. As of January 2015, Congress had not enacted legislation to eliminate the regular computation option for the research tax credit or add a minimum base to the ASC option, as GAO suggested in November 2009. The Tax Increase Prevention Act of 2014 extended the research tax credit—which historically has been a temporary provision of the tax code designed to encourage business innovation by providing a subsidy to new research—through December 31, 2014 (section 111 of division A of Public Law 113-295).However, neither this act nor other legislation has adopted GAO’s suggested change to the research tax credit’s design. Continued use of the regular computation credit option, which arbitrarily distributes subsidies across taxpayers, can distort investment decisions so that research spending and economic activity are not allocated to sectors that offer the highest returns to society. These misallocations may reduce economic efficiency and, thereby, diminish any economic benefits of the credit. The addition of a minimum base for the ASC would reduce the revenue cost of the credit without affecting the average incentive it provides for research.

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    • James R. McTigue, Jr.
    • Director, Strategic Issues
    • (202) 512-9110