STRUCTURAL CHANGE IN THE RESEARCH AND EXPERIMENTATION TAX CREDIT: SUCCESS OR FAILURE?

Abstract

This study examines the availability and incentive effects of the Research and Experimentation tax credit following structural changes in the computation of the credit enacted in the Omnibus Budget Reconciliation Act of 1989 (OBRA89). We find that overall firm eligibility declined after OBRA89, but eligibility increased for firms in high-tech industries, relative to firms in other industries. Dynamic panel regressions indicate that median research and development spending intensity of high-tech (other) firms increased by approximately 15.9 (9.4) percent from 1986-1989 to 1990-1994. For firms that qualified for the credit, our estimates imply approximately $2.08 of additional research and development spending per dollar of revenue forgone.