Increased R&D Tax Credit Signals Texas's Commitment to Progressing Beyond Low Tax Reputation
Stepping up the Game:
In the Fast-paced Tax World of 2025, several states are making moves to lessen the tax burden on residents. Montana, South Carolina, North Carolina, and Oklahoma have all recently passed, or are in the process of passing, bills aimed at reducing their income tax rates.
On April 28, Montana Governor Greg Gianforte signed into law the largest income tax cut in his state's history. Taking a leaf from Gianforte's book, the South Carolina House passed a bill on May 6, setting their aim on achieving a flat 1.99% income tax rate, a significant decrease from the current top rate of 6.2%. North Carolina Senate has already passed a budget that, if revenue triggers are met, would cut their 4.25% flat tax to 1.99% in the coming years. Oklahoma Senate recently gave final approval to legislation to gradually phase out their state income tax.
With states increasing the heat in the tax competition race, Texas lawmakers are aware that even a no-income-tax state can't rest on its laurels. Last week, the Texas Senate unanimously passed Senate Bill 2206, legislation to extend and strengthen the state's research & development tax credit.
Paul Bettencourt, the bill's sponsor, hailed it as a "huge win for innovation." The bill would increase the R&D franchise tax credit from 5% up to 10.903% for R&D with Texas universities and colleges, as he informed his followers on social media. The bill now awaits consideration in the Texas House, with Representative Charlie Geren sponsoring the House companion, HB 4393.
Bettencourt pointed out that increasing the R&D credit would create thousands of jobs, generate millions in labor income, and add to Gross State Product (GSP) growth every year. "Texas remains a national leader in research, innovation, and job creation," he added, ensuring their economy stays on pace with the demands of the 21st century.
John Diamond, director of the Center for Public Finance at Rice University's Baker Institute for Public Policy, reaffirms the importance of R&D activities for technological innovation in the future. He suggests that extending and increasing the R&D tax credit is essential for Texas to act on this reality.
According to the Austin American-Statesman, Texas' credit is on the low end of the spectrum for R&D tax incentives. Countries like China offer a 'super deduction' of 200%, while states like California offer a 15% tax credit on qualified research expenditures and an extra 24% of research payments to public universities and their affiliate hospitals or cancer research centers. Many other states, such as Michigan and Arizona, offer 10%.
Jennifer Rabb, president of the Texas Taxpayers and Research Association, emphasizes the importance of R&D for a healthy economy. She warns that without the extension of the credit, companies may choose to set up their R&D projects elsewhere.
The push to extend and boost the R&D tax credit in Texas coincides with ongoing efforts on Capitol Hill to reinstate full year one business expensing for R&D costs. Advocates argue that the Texas House passing HB 4393 needs to be complemented with Congress ending the tax code's bias against research spending.
As the 89th regular session of the Texas Legislature heads towards its junction on June 2, congressional leaders are working on a bill aiming to send to the President's desk by summer. This proposed bill would extend the personal income tax cuts enacted in 2017, restore full expensing of R&D, and full expensing of other business costs. The enactment of SB 2206/HB 4393 in Texas would align well with these federal changes, further cementing Texas' position as a leader in the R&D sector.
- Carolina, gradual as it may be, is also planning to restore their tax landscape, following South Carolina's recent move to achieve a lower income tax rate.
- In the same vein, Texas, having unanimously passed Senate Bill 2206, is aiming to gradually restore and strengthen its research and development (R&D) tax credit, setting it on the higher end of the spectrum compared to other states.
- With a higher R&D tax credit, Texas hopes to finance, invest, and create more business opportunities in technology and other related areas, thus staying ahead in the innovation race.
- However, John Diamond from the Center for Public Finance at Rice University's Baker Institute for Public Policy argues that even though Texas has taken steps forward, living up to the reality of technological innovation necessitates extending and increasing the R&D tax credit more significantly.
- On the federal level, congressional leaders are working on a bill that aims to not only restore full expensing of R&D costs for businesses but also extend personal income tax cuts and full expensing of other business costs. If enacted, this bill would align well with Texas's SB 2206/HB 4393, further solidifying Texas's position as a leading state in the R&D sector.
