An Analysis of the Availability and Incentive Effects of the R&D Tax Credit after the Omnibus Budget Reconciliation Act of 1989

39 Pages Posted: 27 Apr 2004 Last revised: 24 Oct 2014

See all articles by Sanjay Gupta

Sanjay Gupta

Michigan State University - Eli Broad College of Business

Yuhchang Hwang

Arizona State University (ASU) - School of Accountancy; China Europe International Business School

Andrew Schmidt

North Carolina State University

Date Written: September 19, 2010

Abstract

The U.S. R&D credit has always been incremental in nature, providing a credit for qualified R&D expenses exceeding some base amount. Originally, the base amount was the average of the previous three years’ R&D expenses (i.e., a moving average). After heavy criticism that the credit’s incentive effects were largely offset in the following three years, Congress substituted the moving average base with a fixed-base as part of the Omnibus Budget Reconciliation Act of 1989. This study examines the effect of this structural change on the number of firms that are eligible for the credit and the type of firms that are eligible for the credit. In addition, we examine the incentive effect of the R&D tax credit for firms that qualified for the credit, and whether the incentive effect changed after the implementation of OBRA89. Using data from 1981-1994, we find overall firm eligibility declined after OBRA89, but increased for firms belonging to high-tech industries, relative to firms belonging to other industries. Dynamic panel regressions that control for various non-tax factors indicate that median R&D spending intensity of high-tech (other) firms increased approximately 15.9 (9.4) percent from 1986-1989 to 1990-1994. For qualified firms, our estimates imply approximately $2.08 of additional R&D spending per revenue dollar forgone.

Keywords: Research and Development, Tax Credits, Tax Incentives

JEL Classification: H25, H32, O31, O38

Suggested Citation

Gupta, Sanjay and Hwang, Yuhchang and Schmidt, Andrew P., An Analysis of the Availability and Incentive Effects of the R&D Tax Credit after the Omnibus Budget Reconciliation Act of 1989 (September 19, 2010). Available at SSRN: https://ssrn.com/abstract=535742 or http://dx.doi.org/10.2139/ssrn.535742

Sanjay Gupta (Contact Author)

Michigan State University - Eli Broad College of Business ( email )

632 Bogue Street, 520 BCC
East Lansing, MI 48824
United States
517-432-6488 (Phone)

HOME PAGE: http://www.broad.msu.edu/

Yuhchang Hwang

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

China Europe International Business School ( email )

Shanghai-Hongfeng Road
Shanghai 201206
Shanghai 201206
China

Andrew P. Schmidt

North Carolina State University ( email )

Raleigh, NC 27695-8113
United States

HOME PAGE: http://https://poole.ncsu.edu/people/apschmid/

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