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Beggar thy neighbor? the in-state vs. out-of-state impact of state R&D tax credits

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  • Daniel J. Wilson

Abstract

In this paper, I exploit the cross-sectional and time-series variation in R&D tax credits, and in turn the user cost of R&D, available from U.S. states between 1981-2002 to estimate the elasticity of private R&D with respect to both the within-state (internal) user cost and the out-of-state (external) user cost. To facilitate comparisons to previous studies of the R&D cost elasticity, I first estimate an R&D cost elasticity omitting external R&D costs; the estimated elasticity is negative, above unity (in absolute value), and statistically significant—a finding quite similar to that found by previous studies based on alternative data. Unlike previous studies, however, I then add the external R&D user cost to the regressions. I find the external-cost elasticity is positive and significant, raising concerns about whether having state-level R&D tax credits on top of federal credits is socially desirable. More importantly, I find the aggregate R&D price elasticity—the difference between the internal- and external-cost elasticities—is far smaller than previously estimated. In fact, the preferred specification yields a zero aggregate elasticity, suggesting a zero-sum game among states and raising questions about the efficacy of R&D tax credits more broadly.

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2005-08.

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Date of creation: 2005
Date of revision:
Handle: RePEc:fip:fedfwp:2005-08

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Keywords: Tax credits ; Taxation ; Research and development;

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. “Identifying Technology Spillovers and Product Market Rivalry,” N. Bloom, M. Schankerman & J. Van Reenen (2013)
    by afinetheorem in A Fine Theorem on 2013-11-18 08:28:05
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Cited by:
  1. Mohnen, Pierre & Lokshin, Boris, 2009. "What does it take for an R&D tax incentive policy to be effective?," MERIT Working Papers 014, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  2. Rachel Ngai & Roberto Samaniego, 2011. "Accounting for Research and Productivity Growth Across Industries," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(3), pages 475-495, July.
  3. Diego Comin & Sunil Mulani, 2007. "A theory of growth and volatility at the aggregate and firm level," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  4. Robert Pollin & Dean Baker, 2009. "Public Investment, Industrial Policy and U.S. Economic Renewal," Working Papers wp211, Political Economy Research Institute, University of Massachusetts at Amherst.
  5. Robert Pollin, 2011. "A Policy Framework for Advancing Productive Investments and Clean Energy throughout the U.S. Economy," Working Papers wp265, Political Economy Research Institute, University of Massachusetts at Amherst.
  6. Daniel Wilson, 2005. "Are state R&D tax credits constitutional? an economic perspective," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jun3.
  7. Mohnen, Pierre & Lokshin, Boris, 2009. "What does it take for an R&D tax incentive policy to be effective?," MERIT Working Papers 014, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).

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