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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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Author Info
Daniel J. Wilson

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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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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
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Handle: RePEc:fip:fedfwp:2005-08

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Keywords: Tax credits ; Taxation ; Research and development;

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  1. 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. [Downloadable!]
    Other versions:
  2. Daniel Wilson, 2005. "Are state R&D tax credits constitutional? an economic perspective," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Jun 3. [Downloadable!]
  3. Mohnen, Pierre & Lokshin, Boris, 2009. "What does it take for an R&D tax incentive policy to be effective?," UNU-MERIT Working Paper Series 014, United Nations University, Maastricht Economic and social Research and training centre on Innovation and Technology. [Downloadable!]
    Other versions:
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