Texas Expands R&D Tax Credit Contribution, Demonstrating Ongoing Commitment beyond Low-Tax Reputation
In the recent whirlwind of legislative activity, residents in numerous states might experience a lighter Tax Day burden. On April 28, Montana's Governor, Greg Gianforte (R), signed into law the largest income tax cut in their state's history. Just over a week later, the South Carolina House passed a bill that could lead to a flat 1.99% income tax rate, down from a current 6.2% top rate. This shift in South Carolina followed the North Carolina Senate passing a budget that would reduce their 4.25% flat tax to 1.99% if revenue triggers are met. The Oklahoma Senate even granted final approval to legislation that gradually phases out their state income tax.
In this competitive era of state taxation, Texas lawmakers understand the importance of staying ahead. They demonstrated this in the Texas Senate's unanimous passage of Senate Bill 2206, a bill that strengthens the state's research & development (R&D) tax credit. The sponsor of SB 2206, Senator Paul Bettencourt (R), calls it a "massive win for innovation."
"We're raising the R&D franchise tax credit from 5% to 8.722%, and even higher to 10.903% for R&D with Texas universities and colleges," Senator Bettencourt posted on X following the Texas Senate's 31-0 vote in favor of SB 2206. The bill now awaits consideration in the Texas House. Representative Charlie Geren (R) is sponsoring HB 4393, the House companion to SB 2206.
"For every $1 invested in R&D incentives, Texas generates $12.47 in Gross State Product over 20 years," Senator Bettencourt adds. "This bill creates 6,662 new jobs annually, $445M in labor income, and $748M in GSP growth every year. SB 2206 guarantees Texas remains a leader in research, innovation, and job creation, keeping pace with the demands of the 21st century."
John Diamond, the director of the Center for Public Finance at Rice University's Baker Institute for Public Policy, emphasizes the importance of R&D activities for increasing innovation. In a 2024 paper, he argues that sustained growth and a higher standard of living will be mainly driven by technological innovation in the near future, making increased R&D investments essential. According to Diamond, extending and increasing the R&D tax credit, as proposed in SB 2206 and HB 4393, would be a way to achieve this goal.
"Research and development is crucial for a robust economy," Jennifer Rabb, president of the Texas Taxpayers and Research Association, told the Austin American-Statesman. "Without an extension of the credit, companies will opt for foreign locations for R&D projects."
As compared to other states offering incentives like China's "super deduction" of 200% and California's 15% tax credit on qualified research expenditures, Texas' credit is relatively low. Further, the Tax Foundation has noted that the US has historically treated research and development poorly compared to other countries, with delays in the deduction of R&D costs creating a tax penalty.
Congressman Ellis, president of the Center for a Free Economy, believes that both the Texas House passing HB 4393 and Congress ending the tax code's bias against research spending are necessary to foster innovation and long-term economic growth.
- The Texas House, with Representative Charlie Geren (R) sponsoring HB 4393, is now considering a bill that aims to strengthen the state's research and development (R&D) tax credit, following the Texas Senate's unanimous passage of Senate Bill 2206.
- John Diamond, the director of the Center for Public Finance at Rice University's Baker Institute for Public Policy, believes that increased R&D investments, such as the extension and enhancement of the R&D tax credit proposed in SB 2206 and HB 4393, are essential for increased innovation and achieving sustainable growth.
- Jennifer Rabb, president of the Texas Taxpayers and Research Association, stresses the importance of R&D activities for a strong economy, expressing concerns that companies might opt for foreign locations for R&D projects without an extension of the R&D tax credit.
- In an attempt to stay competitive, tax policies, both at the state level (Texas) and federal levels, play a significant role in fostering innovation and long-term economic growth by promoting R&D activities, as highlighted by Congressman Ellis, president of the Center for a Free Economy.
- Despite offering incentives for R&D, Texas' R&D tax credit is relatively low compared to other countries, such as China's "super deduction" of 200% and California's 15% tax credit on qualified research expenditures, creating a need for further enhancement, as demonstrated by SB 2206 and HB 4393.
