R&E TAX CREDIT REFUND, NEW TAX STATUS FOR R&D LIMITED PARTNERSHIPS ARE TWO PROPOSALS IN CONGRESSIONAL BUDGET OFFICE REPORT ON RESEARCH TAX INCENTIVES
Making R&D tax credits refundable would increase the actual value of the tax credits and increase their effectiveness in encouraging research investment, according to a recently-released Congressional Budget Office report entitled "Federal Support for High-Technology Industries." "For a firm with growing R&E [research and experimentation] expenses, the current credit loses half its value if carried forward one year, and it has no value if carried forward three years," the report asserts. According to the report, one-quarter of the potential credits went unused in 1981, "largely because of limited tax liabilities. "Making the [R&E] credit refundable would ensure that a firm received some value from the credit independent of its tax liability," the Congressional Budget Office suggests. The current tax credit, which is scheduled to expire Dec. 31, 1985, allows a 25% credit for certain research expenditures above the average amount spent over a three-year base period. The president's tax plan proposes to extend the credit for three years, while companion measures in the House (HR 1188) and the Senate (S 58) would make the credit permanent. Another option, suggested by the report, would be to make the R&E tax credit nonincremental by establishing a 4% to 6% credit for "all qualified research spending." This would insure that all firms received some incentive to increase research and that few, if any, received negative incentives." Addressing other possible changes in the credit, the report stresses that Congress "could limit the credit to firms with R&E expenditures (adjusted for firm size) greater than an economywide or industrywide average, rather than a firm-specific average as under current law." This approach, however, would "target" incentives towards firms that already do more research than others in their industry, and it would eliminate any incentive for those doing little research," the report notes. The base period for the credit could also be redefined as the average of the three years ending two years before the current year, the Congressional Budget Office report states. "Lagging" the base in this manner "would raise the credit's present value for firms with a history of rising R&E expenditures," according to the report. The report also discusses proposed changes in the tax status of R&D limited partnerships; the effects of reducing limited partnerships' membership size limitations; and changing the tax treatment of limited partnership royalty income. The budget office observed that R&D limited partnerships currently fund "less than 3% of private R&D undertaken in the U.S. The projects pursued by limited partnerships are often related to product development, which the report contends is "a stage of research where federal support is less clearly needed and where it ought to be denied if the R&D is duplicative." Direct spending programs that support high-technology industries might also be effective in reducing firms' R&D costs, the report continues. For example, the government could make grants for applied research in areas of generic interest to high-technology industries with support provided "by amending the mission of existing agencies, such as the National Science Foundation," the report points out. Alternatively, a new "technology foundation," with generic research as its mission, could be created, the Congressional Budget Office suggested. Direct support for commercial product development might also be considered, the report adds. "Activities such as the measurement and standards programs of the National Bureau of Standards can support commercial innovation by removing technical barriers." Copies of the report may be obtained from Congressional Budget Office, Second and D Streets, SW, Washington, D.C. 20515.
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