Objectives, Scope, and Methodology

Our first objective was to evaluate recent studies of the research tax credit for the adequacy of the data and methods used to determine the amount of research spending stimulated per dollar of revenue cost. In particular, we were to determine if recent studies provided adequate evidence to conclude that each dollar of tax credit stimulates at least one dollar of research spending in the short run and, over the long run, stimulates about two dollars of research spending. These estimates appear to be consistent with the claim that the credit stimulates spending that exceeds its revenue cost. However, the studies have the following data and methodological limitations. These confidential tax return data were not available to the authors of the studies. The eight studies all used measures of the tax incentive that did not incorporate important interactions with other features of the tax code. Factors Determining the Research Tax Credit’s Value to Society

The value of the research tax credit to society cannot be determined simply by comparing the amount of research spending stimulated by the credit versus the credit’s revenue cost. To fully evaluate the credit’s effect, one would have to (1) estimate the total benefits gained by society from the research stimulated by the credit; (2) estimate the resource costs of doing the research; (3) estimate the administration, compliance, and efficiency costs to society resulting from the collection of taxes (or the borrowing of money) required to fund the credit; and (4) compare the benefits to the costs. The publicly available data will not be as accurate because they use definitions of research spending and tax liabilities that are different from IRS. COMPUSTAT and NSF data do not accurately reflect this relationship because both data sources include spending that does not qualify for the credit.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed eight studies of the research tax credit, focusing on the: (1) adequacy of the studies' data and methods to determine the amount of research spending stimulated per dollar of foregone tax revenue; and (2) other factors that determine the credit's value to society.

What GAO Found

GAO found that: (1) four studies supported the claim that, during the 1980s, the research credit stimulated research spending that exceeded its revenue cost, but the other four studies did not support the claim or were inconclusive; (2) all of the studies had significant data and methodological limitations that made it difficult to evaluate industry's true responsiveness to the research tax credit; (3) the studies did not use tax return data to determine the credit's incentive because the authors did not qualify for access to such data; (4) publicly available data were not a suitable substitute for the tax return data because public sources used different definitions of taxable income and research spending; (5) the studies' analytical methods, such as use of industry aggregates and failure to incorporate important tax code interactions, made their findings imprecise and uncertain; (6) there was little research on the latest design of the credit to determine its effect on incentives and costs; (7) the studies' evidence was not adequate to conclude that a dollar of research tax credit would stimulate a dollar of additional short-term research spending or about two dollars of additional long-term research spending; and (8) to measure the credit's true impact, the studies would need to assess the research's net benefit to society, resource costs of research, and administrative, compliance, and efficiency costs of funding the credit.