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R&D investment and the use of tax credits are important policy tools for policymakers in advancing technological competitiveness and regional economic growth. While issues related to federal tax credits have been in the forefront of current policy debates, state-level incentives increasingly play an important role as well. Indeed, state governments are engaged in rich variety of policy initiatives that foster knowledge-based growth and employment, including through the use of tax incentives to promote local research and production activities.
Collectively, these state level investments are substantial. The top 15 U.S. states in R&D expenditures alone contributed to approximately 78 percent of the nation’s total R&D expenditures in 2022, according to the National Science Foundation. Leading the list is New York, which invested over $506 million, accounting for 19.2 percent of the national share, closely followed by California at 18.5 percent. Texas ranks third with an investment representing 9.4 percent of the national share.
The NSF data also shows R&D per capita, which provides insight into a state’s R&D intensity relative to its population size. It is a mixed picture. States with high R&D expenditures, like New York, do not necessarily rank highly in terms of R&D per capita. Meanwhile, states with lower state R&D expenditures, like Washington, achieve high R&D per capita. This can be due to a number of factors, including being home to the headquarters of a major global corporation whose R&D activities account for a large share of the state’s total.
In addition to direct R&D spending efforts, state governments increasingly use tax incentives to promote innovation investment. Most U.S. states offer R&D tax credits based on historical R&D expenses or based on moving averages. Minnesota pioneered the first R&D credit in 1981, with Virginia joining in 2011. Today, 35 states offer R&D credits, albeit with varying restrictions and conditions. For example, Colorado limits R&D credits to specific enterprise zones, and New York ties R&D credits to job creation metrics under its Excelsior Research and Development Tax Credit.
California’s R&D tax credit has been in place since 1987, allowing companies in that state to reduce their corporate income tax burden by 15-24 percent—providing California a competitive advantage. According to a 2021 study by the Milken Institute, there was a strong correlation between the total investment in R&D in California and the amount of tax credits claimed by local firms.
However, the NSF data also shows that tax credits alone do not always drive the state-level R&D expenditure. Some states with no R&D tax credit, such as Washington, Alabama, Tennessee, and North Carolina, still maintain high R&D spending. Alabama, for example, drives state R&D activities through its universities, while Tennessee drives state R&D activities through its strong automotive and mobility R&D investment.
In all, R&D expenditures and tax credits are a valuable tool for state policymakers but are not determinative alone. A successful state innovation strategy also requires a supporting mix of policies that encourage local skills and talent development and well as those that facilitate cooperative partnerships across academia and industry.
Data visualization by William Taylor