A look at why Texas reinstated R&D tax incentives demonstrates why Washington should not let them expire

Effective January 1, 2014, Texas once again offers tax incentives for research and development. An article in Texas CEO magazine last fall celebrated their return.

The R&D tax break is back in Texas.

…Before passing this law, Texas was one of only a handful of states that did not offer some sort of research and development tax incentive. It is estimated the lack of this tax incentive cost the state over $3 billion in lost economic activity and over 20,000 jobs. The incentive is aimed at creating jobs, providing new technologies and bridging the gap between private-sector research and institutions of higher education. This tax benefit should make Texas economically competitive in R&D, reduce the tax burden on R&D conducted in Texas, promote the creation of new, highly skilled high paying jobs, and complement Texas manufacturing industries by encouraging innovation and efficiencies in applying new technologies and products.

The Texas experience demonstrates that when the incentives disappear, so too do the investment and jobs associated with expanded R&D.

 In our brief, Supporting Research and Development with Responsible Tax Policy, we point out the positive economic benefits.

Several studies have demonstrated that R&D incentives are effective in increasing the amount of R&D in a state. For example a study by economist Daniel Wilson of the Federal Reserve Bank of San Francisco found that a 10 percent decrease in the cost of doing R&D in a state increases the amount of R&D done in the state by 25 percent…

Texas offered R&D incentives from 2000 to 2007. By bringing them back, lawmakers acknowledge the mistake made when they allowed them to expire. The Houston Chronicle reports on how business activity is spurred by the incentive. The paper quotes Texas Association of Manufacturers president Tony Bennett.

“For large and small companies in industries like manufacturing, high-tech, energy, biotechnology, R&D is the critical ‘first phase’ where questions, ideas and problems are fleshed out in labs, the field or production facilities to become the products and solutions that power the Texas economy,” Bennett said.

Research prepared for Texans for Innovation by TXP, Inc., an economic analysis and policy firm, made the business case for the incentives that is summarized above. The analysts note the economic value of R&D.

R&D, innovation, and investment are critical components of the comparative advantage of any modern economy at both the national and state level. Texas is fortunate to possess many of the fundamental elements necessary for success, as our universities, labor force, and existing clusters in knowledge-intensive sectors are all important building blocks in both maintaining and enhancing our R&D base. If state tax policy can be equally competitive, the result is likely billions of dollars in annual economic activity, millions of dollars of tax revenue, and tens of thousands of jobs.

Meanwhile, in Olympia, lawmakers are poised to make the Texas mistake.

 This time, maybe it makes sense to learn from someone else’s error. We don’t have to replicate the unhappy experience.

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