Recent ResearchValue and Effectiveness of Research Tax Credit Should be Reexamined, says GAO

Representing a substantial federal commitment, the number of tax credits, deductions and exemptions - collectively referred to as "tax expenditures" - has more than doubled since 1974 and needs to be re-examined to evaluate efficiency, effectiveness, and equitability, according to the Government Accountability Office (GAO).

A recent GAO report describes how tax expenditures have changed over the past three decades and the amount of progress made since the 1994 recommendations to improve scrutiny of tax expenditures. Measurements include change in number, size, and in comparison to federal revenue, spending, and the economy.

The federal income tax has long been used as a tool for accomplishing social and economic objectives, while the general objective of tax expenditures are to encourage particular types of activities including funding for research and development, the report states. In determining effectiveness of tax credits, some are enacted on a temporary basis to provide opportunity for evaluation. Such is the case for the research tax credit. Established on a temporary basis in 1981, the research tax credit has been extended 11 times as of 2004.

Studies on the research tax credit in 1996 provided mixed evidence on the amount of spending stimulated and used publicly available data that were not suitable proxy for the tax return data, according the report (see the June 21, 1996 issue of the Digest). To fully assess the value to society from the tax credit, the report states that researchers instead need to look at more than just spending stimulated per dollar of revenue costs. Comparisons should include (1) the total benefits gained by society from research stimulated by the credit and (2) the estimated costs to society resulting from the collection of taxes required to fund the credit.

Social benefits of research conducted by individual companies include any new products, productivity increases, or cost reductions that benefit other companies and consumers throughout the economy, the report notes. However, the effect of the research on other companies and consumers can be difficult to measure.

Tax Expenditures Represent a Substantial Federal Commitment and Need to Be Reexamined is available from GAO at: http://www.gao.gov/new.items/d05690.pdf