Fiscal stimulus round II?

With the recovery still shaky and the crisis in Europe threatening growth in the months to come, it makes sense to think about another (smaller) round of fiscal stimulus. Congress is considering a bill that would do some good by providing aid to states and extending unemployment benefits. One provision that is always mentioned in descriptions of various stimulus packages but never described in detail is a tax credit for research and development.

Democrats said that the safety-net aid was desperately needed and that the business tax breaks included in the measure, like a popular credit for research and development, would help spur employment.

Sounds good on paper - who could be against research, development, and employment? But what exactly is this proposal?

It turns out that the proposal is to renew a tax credit for research and development that was originally enacted in 1981 and has been renewed every year since. The tax credit provides a subsidy amounting to about 6.4 to 7.3 percent on qualified R&D expenditures, according to the GAO (2009 report here, 1996 report here). The reports do not explain what types of research has been done as a result of the credit. The reports do indicate a number of things: no one is sure how much additional spending is induced by the tax credit, with estimates ranging from near zero to two dollars per dollar spent; no one has studied the benefits to society of this spending in terms of new products created or any other metric; much of the tax credit is simply a windfall to companies that would have done the research anyway; because the terms on which companies qualify for the tax credit are so confusing, many small businesses who might qualify never apply; of the $6 billion spent on the credit in 2005 (the latest year for which data is available), over half of the money went to large corporations with revenue over $1 billion.

Corporate lobbies claim that failing to renew the credit would put jobs at risk:

Every day the R&D tax credit remains expired, the well-paying jobs, economic growth and revenue to the treasury it supports are placed at risk. TechAmerica calculates $45 million and 330 jobs are at risk each day the credit remains expired. With more than 70 percent of credit dollars going to U.S. wages, the R&D tax credit is a jobs credit.

But until I see some actual analysis of the effects of the tax credit, I'm going to assume it's just a bit of corporate welfare that Congress won't make a permanent part of the tax code because renewing it annually gives them an opportunity to extort money from corporate lobbies. (Hey, I agree with the WSJ on this one - though the WSJ gives the corporations who have come out against the stimulus bill a lot more credit for virtuous behavior than they deserve.)

If the size of the stimulus package needs to be reduced to get it through Congress, the R&D tax credit would be a good thing to drop (how much do you want to bet aid to states to keep teachers and firefighters from being laid off will be reduced instead?). If we want to promote R&D spending, there are surely better ways: increase funding for the National Science Foundation and other scientific agencies or subsidize undergraduate and graduate students in the sciences for a start.