The United States was one of the first countries to enact a federal tax credit for R&D in 1981, and throughout that decade we had the most generous R&D incentive in the world. However, other countries soon realized the benefit of the R&D credit and adopted not only similar but often more lucrative credits.
By 1996, the U.S. ranked only 7th in R&D tax generosity out of the countries that had an R&D credit, and by 2004 we had slipped to 17th place. The key reason — every other country with an R&D tax credit has increased the generosity of those credits. Not only has the U.S. not increased the credit, but to date Congress has not yet extended the credit for 2010. The result – by 2009 the U.S. ranked dead last — leaving the number one position to France.
However, if Congress were to enhance the R&D tax credit and make it permanent as other countries have done instead of simply extending it each year, the result would be an immediate and positive impact on U.S. innovation and job creation.
For example, a study by the Information Technology and Innovation Foundation think tank suggests that raising the Alternative Simplified (ASC) R&D tax credit rate from 14 to 20 percent would create 162,000 jobs in the short-term and an unspecified number of additional jobs in the longer-term. ITIF also estimates that raising the ASC would increase the annual GDP by $90 billion, the number of patents issued by 3,850 and federal tax revenues by $17 billion.
Raising the ASC to 20 percent would bump the U.S. R&D tax generosity rank to number 10. However, we would need to increase the ASC to 31 percent to move to 5th place and to a whopping 47 percent in order to reclaim the number one spot with the most generous R&D credit of the 21 countries that currently offer one.
Fortunately for American businesses, all but about 12 states offer a state R&D credit. Some of these state credits are more lucrative than the federal credit, and some are even fully refundable.
For example, New York has a refundable credit, specifically for companies with revenues under $10 million, that averages between 9-18%. Starting in tax year 2010, the Minnesota state credit will be expanded and made refundable. Louisiana has one of the most lucrative credits of all the states. Depending on the size of the company, the credit can be from 8 to 40 percent, and it is also refundable.
Companies located in states that offer a state R&D credit can realize significant dollars in tax credits, especially when combined with the federal credit. These dollars can be reinvested to fund additional R&D which, in turn, will boost both innovation and job creation in the U.S.