Why Are Some States More Generous in Offering R&D Tax Credits than Others? An Empirical Answer

Abstract

This article examines political cost factors that affect a state's propensity to adopt a corporate income tax credit to encourage research and development (R&D) activities in the United States. Assuming state elected officials are vote-maximizers, this article hypothesizes that politicians' consideration of potential revenue losses and influence from organized interests are critical in a state's decision to provide a R&D tax credit. To test the hypothesis, two statistical models are specified. With a dichotomous dependent variable of whether or not a R&D tax credit is offered, a Logit regression model is utilized. For the interval level dependent variable of effective R&D credit rates, this article specifies a Tobit model. The results show that politicians' concerns about revenue losses loom much larger than private organized interests.

Keywords:

• research and development
• tax credit
• political cost
• revenue loss
• organized interests

Notes

¹This author owes special thanks to Dr. Dan Wilson, who graciously allowed the author through personal communication to use his data on the state R&D tax credit availability and the effective credit rates.

²However, Wilson (2005a) questions the assumptions of the cost differentials between in-state and out-of-state firms. According to him, “the external-cost elasticity is positive and significant, raising concerns as to whether having state-level R&D tax credits on top of federal credits is socially desirable” (p. 2).

³For example, faced with the increasing number of corporate income credits and the amounts claimed, Advocates for Connecticut's Children and Youth argues that more aggressive measures for disclosing the information on tax credits are required (ACCY, 2004).