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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.

Action:

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).

Progress:

As of January 2014, 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 American Taxpayer Relief Act of 2013 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, 2013. As of January 2014, Congress had not enacted legislation extending the research tax credit. Legislation has been proposed, but not enacted, which would terminate the regular credit and increase the ASC, although it does not include a 50 percent minimum base amount.1 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.

 

[1] See, e.g.H.R. 3355, 113th Cong. (2013).

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    • James R. White
    • Director, Strategic Issues
    • whitej@gao.gov
    • (202) 512-9110