R&E TAX CREDITS STIMULATE $ 1-$ 2.5 BIL. IN ADDED RESEARCH SPENDING

R&E TAX CREDITS STIMULATE $ 1-$ 2.5 BIL. IN ADDED RESEARCH SPENDING from 1981 through 1985, while companies saved $ 7 bil. in tax revenues, the General Accounting Office estimates in a recently released report. "This represents an increase of between 15 and 36 cents for every dollar of tax revenue foregone [by government] due to the credit over this period," GAO points out. The report attributes the "limited" increases found in research and experimentation spending resulting from the tax credit to "the low average effective rate of credit in the early 1980s and because research spending has been relatively unresponsive" to reductions in cost. The effective rate measures the reduction in the cost of research due to the credit. The report is based on Internal Revenue Service data on a sample of 800 corporations. It was conducted at the request of Rep. Donnelly (D-Mass.) and the House Ways and Means and Senate Finance committees, through a requirement in the 1988 "Technical and Miscellaneous Revenue Act." Congress has criticized the pharmaceutical industry for increasing drug prices in light of benefits such as the R&E tax credit: the industry maintains the increases are necessary to cover research costs. At a July 18 hearing on drug prices, Sen. Pryor (D-Ark.) questioned the Pharmaceutical Manufacturers Association about the extent of the industry's R&D expenses in light of its tax breaks. He stated that drug companies annually receive tax breaks, including the R&E tax credit, of well over $ 1 bil. ("The Pink Sheet" July 24, p. 4). The report found that large corporations with assets of up to $ 250 mil. used about 80% of the total tax credit claimed during the 1981-1985 period. GAO notes, "these same corporations accounted for almost 75% of the total assets of corporations filing tax returns for those tax years and claimed about 85% of all other tax credits, such as the investment tax credit." GAO estimates the average effective rate of credit was approximately 4% from 1981 to 1983, well below the statutory rate. The tax credit was established in 1981. At that time, companies could reduce their tax liabilities by 25% of qualified research and experimentation spending over a base amount. The percentage was lowered to 20% in 1986. The "primary factor" in determining an individual company's effective rate is the company's pattern of qualified spending over a period of years, GAO explains. Noting that an increase in current spending will raise the three-year moving-average base for future years and thereby reduce future credits, GAO states that "the effective rate of credit is lower than the statutory rate (20%) because it takes these future reductions into account." Congressional and Administration proposals to restructure the tax credit by changing the definition of base spending may result in a higher level of spending increases, GAO points out. The report notes the Treasury Department has estimated the changes would increase spending stimulated per dollar of tax revenue saved by companies from an average of $ 0.20 to as much as $ 1.21. GAO notes that the proposals would "change the definition of base spending and provide for an alternative credit computation for taxpayers whose expenditures fall below their base spending," thereby raising the effective tax rate of the credit. The Senate proposal, contained in legislation introduced by Sen. Danforth (R-Mo.), is pending before the Senate Finance Committee. The Administration's proposal was released in the President's fiscal 1990 budget. The report does not address the most recent House proposal to revise the tax credit. Although legislation introduced by Rep. Jenkins (D-Ga.) was originally identical to the Senate bill, it was subsequently revised by the Ways and Means Committee so that the spending base would be computed differently. Instead of indexing the base to the GNP, the committee version of the bill indexes the base to individual company sales. The revised bill is contained in the Omnibus Budget Reconciliation Act (HR 3299), currently under consideration on the House floor. Both House and Senate proposals would make the R&E tax credits permanent. The credits are currently scheduled to expire on Dec. 31. The House Budget Committee Report on the budget reconciliation bill notes that the provision to modify and make the credit permanent would result in a $ 4.4 bil. tax revenue loss to the government from 1990 to 1994. The Treasury Department has estimated that the administration proposal "would be roughly revenue-neutral relative to an extension of the current credit, costing $ 4.9 bil. over the 1989-1993 period," GAO notes. Treasury estimated that the Senate proposal would cost $ 6.5 bil. over the same five year period, according to GAO.