Enhancing R&D Tax Incentives Would Create 269,000 U.S. Jobs; New ITIF Report Projects Benefits for All 50 States

WASHINGTON—Tax incentives for research and development (R&D) are lower in the United States than in many other industrialized economies, especially with recent federal tax law that now prevents firms from expensing the full value of R&D investments in the first year. By restoring full expensing and doubling the tax credit rates, 269,000 R&D jobs would be created across the country, according to a new report from the Information Technology and Innovation Foundation (ITIF), the leading think tank for science and technology policy.

“Companies aren't investing enough in R&D and new equipment to spur innovation, productivity, and growth across the economy. One reason for that is that R&D tax incentives in the United States are well below those of other advanced economies,” said ITIF Analyst, Ian Clay. “The recent removal of first-year full expensing of R&D expenditures has only worsened these problems.”

The report estimates R&D-related direct employment gains to each state—not including the supplier and induced jobs indirectly created in the short term or longer-term employment benefits from boosting innovation and productivity—if full expensing of R&D expenditures in the first year is restored, if the statutory rates of the regular credit (RC) and alternative simplified credit (ASC) for qualified research and development expenditures (QRE) are doubled to 28 percent and 40 percent, respectively, and if both full expensing is restored and rates are doubled.

As of part of the 2017 Tax Cut and Jobs Act, beginning in 2022, U.S. businesses are no longer allowed to fully deduct their R&D expenditures from their taxable income. Now, they must deduct their expenses according to a five-year depreciation schedule. Because of the time value of money and devaluation from inflation, the present real value of the deductions is lower, which has decreased the incentive to invest in R&D. Similarly, low effective R&D credit rates ensure that U.S. R&D tax incentives lag behind those of other advanced economies.

Building off of a 2020 ITIF report and using an econometric model with subsidy rates from the Organization for Economic Cooperation and Development (OECD) OECD.Stat website, the new ITIF report estimates that restoring full expensing alone would create an estimated 81,000 direct jobs. Doubling the tax credit rates would create 188,000 jobs. So, if Congress were to do both steps, 269,000 jobs would be created.

The report projects all 50 states would benefit from enhanced R&D tax incentives if both measures were implemented, with the greatest share going to states with the highest concentrations of R&D-intensive industries:

“Increasing the generosity of R&D tax incentives would boost business R&D spending and create jobs in all 50 states plus Washington, D.C,” said Clay. “Since we only report estimates for direct job creation, the full employment benefit to each state is understated.”

Read the report.

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The Information Technology and Innovation Foundation (ITIF) is an independent, nonprofit, nonpartisan research and educational institute focusing on the intersection of technological innovation and public policy. Recognized by its peers in the think tank community as the global center of excellence for science and technology policy, ITIF’s mission is to formulate and promote policy solutions that accelerate innovation and boost productivity to spur growth, opportunity, and progress. Learn more at itif.org.