r&d tax credits

Not all publicly traded companies use savings from tax cuts the same way, NBER researchers James Cloyne, Ezgi Kurt, and Paolo Surico report in “Who gains from Corporate Tax Cuts?  While changes in marginal tax rates and investment tax credits (ITC) can have significant effects on the behavior of publicly traded C-corporations, manufacturers and goods producers are much more likely to recirculate the savings into additional capital expenditure and employment than firms in the service sector.  Publicly traded service sector companies typically use the proceeds from a tax cut to increase dividends to current investors in the firms.

President Joe Biden has signed the Inflation Reduction Act, a $740-billion bill that largely focuses on clean energy and climate resiliency, deficit reduction and health care, funded through tax changes. Unlike the initial proposals for a reconciliation spending package, this legislation provides little spending that will directly affect tech-based economic development strategies, although its climate provisions will spur significant growth opportunities for cleantech. There are multiple provisions and opportunities included in the act that are important for regions to understand.

The importance of business and industry R&D investment for competitiveness and economic growth is a well-entrenched dictum of national and state innovation policy across most of the developed world. Approaches for incentivizing increased research expenditures fall into two broad categories, direct grants and subsidies to offset R&D costs or R&D tax credits companies may take post-investment for research expenditures. Direct subsidies or competitively awarded grant programs optimally target specific activities, desired outcomes and performance milestones (e.g., the SBIR/STTR programs). A new paper looks at which approach – direct subsidies or R&D tax credits – actually works better for achieving at least one of the stated policy goals: increasing competitive, private R&D investment?

A recent paper published by SSRN provides a detailed look at the relationship between financial incentives and state fiscal health. The authors control for many potentially-related factors and still find significant, negative impacts of incentives. While the study helps fuel calls for critical analysis and careful implementation of tax incentives, the results may not be as clear cut as some coverage may suggest.

From investment returns to education savings, R&D incentives and more, tax policy and innovation are inextricably linked. Not surprisingly, the U.S. House GOP’s tax plan, released last week and updated through a significant amendment on Monday, could have significant impacts on the innovation economy.

At least three dozen states offer reductions in tax obligations to companies for some portion of the costs of the businesses conducting research and development within their particular state. During the 2017 session, one fewer could be included among the ranks. With little documented opposition, the Oregon legislature decided to get out of the R&D tax credit business altogether (p. 41, source).  Why? Are there lessons for other states’ advocates for innovation?

When the U.S. government made their R&D tax credit permanent in December 2015, it made a long-term commitment to using incentives to entice private firms to invest in research and development, joining many countries around the world. Although most studies find that R&D tax incentives promote R&D, there is little consensus on the extent of this effect. A recent firm-level analysis from the United Kingdom finds some of the strongest evidence to date on the effectiveness of R&D tax credits in incentivizing innovation. At the same time, however, other studies suggest other elements of a national economy such as education and infrastructure may be more important.

As the federal and state governments look for methods to support the creation and retention of well-paying science and tech (S&T) and manufacturing jobs, two recent reports have found that R&D tax credits play a vital role in helping keep domestic R&D-intensive firms resilient from economic downtowns and competition from emerging economics. These studies confirm the importance of R&D-intensive firms, which have taken advantage of R&D tax credits, are more likely to report a higher percentage of corporate liquidity; are less likely to cut capital expenditures and employment; and, downsize considerably less than the average firm.