State-Level R&D Tax Credits: A Firm-Level Analysis

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Abstract

California's changes in R&D tax credit rates on biopharmaceutical and software firms' research investment during 1994-1996 and 1997-1999 is compared using two approaches. Consistent with the federal research tax credit literature, the difference-in-differences analysis provides some evidence of increased R&D expenditure in response to research tax credit rate increases. In contrast, the estimated tax price elasticities obtained by computing and testing the tax prices for in-house research are dramatically higher than the existing literature's estimates near unity. Possible explanations include firms' greater sensitivity to state-level policy, industry factors, sample characteristics and measurement error. For contract research with universities and other not-for-profit research organizations, the findings suggest a tax credit may not be the optimal policy tool. Finally, state-level R&D incentives do not appear to have equal incentive effects across industries.

Original languageEnglish (US)
Article number17
JournalB.E. Journal of Economic Analysis and Policy
Volume5
Issue number1
DOIs
StatePublished - 2005

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics
  • Economics, Econometrics and Finance (miscellaneous)

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