Why Businesses Locate R&D in High Tax States: The Role of the States' R&D Tax Credit Effectiveness

• Published in: Advances in Taxation Vol. 28; pp. 169 - 186
• Main Authors: Billings, B. Anthony, Musazi, Buagu N, Volz, William H, Jones, Deborah K
• Format: Book Chapter
• Language: English
• Published: United Kingdom Emerald Publishing Limited 09.12.2020
• Subjects: Accounting & Finance; Accounting Research/Theory; Accounting/Accountancy; union density; State tax burden; refundable tax credits; R&D tax credit; state GDP; user cost of capital
• ISBN: 1800433271; 9781800433274
• ISSN: 1058-7497
• DOI: 10.1108/S1058-749720200000028006

Abstract This chapter evaluates the effectiveness of states' research and development (R&D, used to represent creditable research expenses) tax credits. Prior studies report mixed results on the effect of state R&D tax credit incentives. Generally, such studies consider the influence of state R&D tax credits by applying the statutory income tax and R&D credit tax rates. We reexamine the effect of a state's entire tax burden instead of the statutory tax rates in moderating the effectiveness of a state's R&D tax credit incentives. After controlling for several nontax factors, such as the workplace environment, political environment, and workforce education levels in a regression analysis during the 2010–2013 period in 50 states, we find that statewide private-sector R&D spending is a positive function of the R&D tax credit and this effect increases with the overall level of the state tax burden. We attribute this finding to the fact that high tax burdens increase the present value of the R&D tax credits.