Are State R&D Tax Credits Worthwhile?
March 25, 1999
State tax breaks for corporate research and development (R&D) efforts haven't been shown to be effective, says a new study from the Federal Reserve Bank of Dallas. As a way to attract high- tech jobs, many states now have some form of R&D credits. In Texas, a 5 percent R&D credit against state franchise taxes levied on business has been proposed.
Analyzing the effect of existing state tax credits, and the one proposed for Texas, the study by Fed economists Fiona Sigalla and Alan Viard found that R&D tax credits could "tip the balance" for a company deciding where to put its research facilities. However, the value of most state R&D credits is small compared with "the huge investment necessary for most research projects."
And just because a company moves its R&D activities to a state doesn't necessarily create many extra jobs, and could subsidize job creation elsewhere, if a firm uses the extra money to produce more jobs in its home state.
- Across the United States, 21 states now offer some form of R&D credits, say the Fed researchers.
- Supporters of the R&D credit say Texas is the only high- tech state that doesn't offer such an incentives.
- However, New Hampshire recently repealed its corporate income tax credit for R&D.
- And in Missouri, officials say 70 percent of the $16.8 million in R&D tax credits that were claimed there went to just three companies, while 60 others spit the other 30 percent.
The proposed tax credits in Texas would be limited to firms making additional R&D investments. However, the credit would be doubled to 10 percent if the work is done in a high-unemployment country.
Source: Robert Elder Jr., "R&D Credit Is Popular -- But May Be of Little Value," Texas Journal, Wall Street Journal, March 24, 1999.
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