Technological innovation is the major factor driving economic growth (and, even more importantly, personal income growth) in the New Economy. That is why one of the best policy tools to stimulate innovation is the research and development tax credit -- commonly known as the R&D tax credit.
Because companies seldom retain all of the benefits of their research, particularly riskier- and earlier-stage research, economists find that companies systematically under-invest in R&D. A principal economic rationale for establishing an R&D tax credit, therefore, is to reduce the difference between the private and actual rates of return by lowering the costs of privately financed research.
Currently, the federal government offers companies a 20 percent tax credit on year-to-year increases in R&D. At least 35 states have their own versions of the R&D credit, with many states offering a "piggyback" credit on the amount of a firm's research expenditures that qualify for the federal credit.
Research shows that the R&D tax credit has been a cost-effective policy tool. For example, the former Congressional Office of Technology Assessment concluded: "For every dollar lost in tax revenue, the R&D tax credit produces a dollar increase in reported R&D spending, on the margin." Other studies have found even greater benefits, with the economic benefit-to-tax cost ratio between 1.3 and 2.0.
At the state level, R&D tax credits have the added benefit of boosting the business climate for high-tech investment, and since high-tech jobs pay more than 75 percent more than non-high-tech jobs, this is a good investment. Some, however, have criticized state R&D tax credits as corporate welfare. In comparison to the vast majority of the more than $45 billion in corporate tax breaks states provide each year that simply reward companies for what they already would do, the R&D credit has the advantage of providing a vital economic stimulus.
State credits vary significantly. Rhode Island has a credit of 22.5 percent for the first $111,000 of qualifying expenditures and 16.9 percent for investment above $111,000. At 20 percent, Hawaii's credit matches the federal tax credit, is refundable, and is also among the highest R&D tax credits in the nation. Hawaii's credit can be used against not only income tax, but insurance premiums and franchise taxes.
At least one state, Massachusetts, provides a more generous credit for company research expenditures at universities. It provides a 10 percent credit for company expenditures, but a 15 percent credit for company expenditures on basic research at universities in the state.
Technological innovation is driving the New Economy, and state economic development policies need to be modernized accordingly. Incentives for research and innovation, like establishing or raising R&D tax credits, are important and farsighted steps in the right direction.
General Law of Massachusetts, Chapter 63, Section 38M.
www.state.ma.us/legis/laws/mgl/63%2D38m.htm
Public Law of Rhode Island, Chapter 221, 99-S 525A, Section 2, 44-32-2 and 44-32-3
www.rilin.state.ri.us/publiclaws/law98/law98400.htm
Edward Gresser, Paul Weinstein, Jr., and Will Marshall, "Raising Our Game: A National Competition Strategy," Progressive Policy Institute, June 2006
dlc.org/ndol_ci.cfm?kaid=125&subid=164&contentid=253926
Robert D. Atkinson, Boosting Technological Innovation Through the Research and Experimentation Tax Credit, Progressive Policy Institute, May 1999
www.ppionline.org/ppi_ci.cfm?
contentid=1411&knlgAreaID=140&subsecid=293
State Research and Development Tax Incentives, State Science & Technology Institute, May 1997
www.ssti.org/Publications/Onlinepubs/r&d_97.pdf
Robert D. Atkinson, Randolph Court, and Joseph M. Ward, "Industry Investment in R&D," The State New Economy Index, Progressive Policy Institute, June 2002
www.neweconomyindex.org/states/2002/05_innovation_05.html
Hon. Les Ihara
State Senator
Hawaii State Senate
State Capitol #217
Honolulu, HI 96813
(808) 586-6250
senihara@capitol.hawaii.gov
Hon. David Ige
State Senator
Hawaii State Senate
Hawaii State Capitol, Room 215
415 South Beretania Street
Honolulu, HI 96813
(808) 586-6230
(608) 586-6231 (fax)
sendige@capitol.hawaii.gov
Paul Weinstein
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Progressive Policy Institute
600 Pennsylvania Ave, SE, Suite 400
Washington, DC 20003
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(202) 544-5014 (fax)
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Katie Campbell
Policy Analyst
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