[Pharm-policy] The R&D Tax Credit and Industry Spending on R&D

[James Love]

These are some data from Pete Stark's December 13, 1999 CRS report on
taxation of the pharmaceutical industry.  


What is interesting to me is the relatively small numbers for the R&D
tax credit, which was around $200 million per year for the entire
pharmaceutical industry.  Like the Orphan Drug Tax Credit, this is
evidence of levels of industry spending on R&D.  However, the
relationship between the R&D tax credit and expenditures is more complex
than is the case for the Orphan Drug Tax Credit, and it is somewhat more
difficult to estimate levels of qualifing R&D investments.  In general,
it is 20 percent of the increase in R&D spending over a "base amount,"
for some R&D expenditures (the base amount is the product of the
percentage of revenues spent on R&D from 1983 to 1989, multiplied by the
average revenue over the past four years, but not less than 50 percent
of qualified expenditures), and 20 percent of the total of other
expenditures.  But we'll try to make a model of the credit and publish
some results.   For example, and this is really quick and dirty, if one
assumed that the base amount was always 50 percent of qualifying
expenditures, the credit would be equal to 10 percent of qualifying
expenditures (.2 X .5 = .1). Thus, for example, the $219 million in 1996
tax credits would imply total industry spending on R&D was $219/.1 =
$2.19 billion.   To put this into perspective, PhRMA claims that
industry domestic R&D spending was actually $13.6 billion in 1996, or
more than six times the amount predicted by this simple model of the R&D
tax credit.  Clearly it will be difficult to reconcile the PhRMA
assertions with the IRS data, even after working on the model. 

Note: It would be very helpful if the IRS could publish not only the
amount of the credit, but the amount of the qualifying R&D expenditures,
upon which the credit was based.  To understand how complex the general
R&D tax credit is, check out the statute here:
http://www4.law.cornell.edu/uscode/26/41.html

Here are the data and the URL for the Stark report.  

   Jamie

http://www.house.gov/berry/prescriptiondrugs/Resources/crs_pharm_tax_memo.PDF


Orphan Drug Tax Credit

1990:   15
1991:   18
1992:   17
1993:   19
1994:   19
1995:   NA
1996:   NA

Other Tax Credits You may be interested in

Foreign Tax Credit:

1990:   1,205
1991:   1,367
1992:   1,613
1993:   1,960
1994:   1,960
1995:   2,633
1996:   2,628

Possessions Tax Credit (Primarily Puerto Rico I assume)

1990:   1,665
1991:   1,883
1992:   2,033
1993:   2,150
1994:   2,116
1995:   1,611
1996:   1,651

General Business Tax Credit (R&D tax credit)

1990:   142
1991:   150
1992:   180
1993:   208
1994:   271
1995:   214
1996:   219


-- 
James Love
http://www.cptech.org
mailto:love@cptech.org
voice 1.202.387.8030