Beggar Thy Neighbor? The In-State, Out-of-State, and Aggregate Effects of R&D Tax Credits

Daniel Wilson

No 2005-08, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: The proliferation of R&D tax incentives among U.S. states in recent decades raises two important questions: (1) Are these tax incentives effective in achieving their stated objective, to increase R&D spending within the state? (2) To the extent the incentives do increase R&D within the state, how much of this increase is due to drawing R&D away from other states? In short, this paper answers (1) "yes" and (2) "nearly all," with the implication that the net national effect of R&D tax incentives on R&D spending is near zero. The paper addresses these questions by exploiting the cross-sectional and time-series variation in R&D tax credits, and in turn the user cost of R&D, among U.S. states from 1981-2004 to estimate an augmented version of the standard R&D factor demand model. I estimate an in-state user cost elasticity (UCE) around -2.5 (in the long-run), consistent with previous studies of the R&D cost elasticity. However, the R&D elasticity with respect to costs in neighboring states, which has not previously been investigated, is estimated to be around +2.7, suggesting a zero-sum game among states and raising concerns about the efficiency of state R&D credits from the standpoint of national social welfare.

Keywords: Tax credits; Taxation; Research and development (search for similar items in EconPapers)
JEL-codes: H23 H25 O18 O38 (search for similar items in EconPapers)
Pages: 51
Date: 2007-08-01
New Economics Papers: this item is included in nep-geo, nep-ino, nep-pbe, nep-tid and nep-ure
Note: PDF date: First draft: April 2005. This draft: August 2007.
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Citations: View citations in EconPapers (14)

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Related works:
Journal Article: Beggar Thy Neighbor? The In-State, Out-of-State, and Aggregate Effects of R&D Tax Credits (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:2005-08

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DOI: 10.24148/wp2005-08

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