Evaluating the effectiveness of state R&D tax credits

This paper aimed to analyze the effectiveness of state R&D tax credit programs in the context of R&D-relevant policies and regional economic development policies. Although there were extensive theoretical recommendations for promoting private R&D, and state R&D tax credit programs have been one of the most popular regional economic development programs, only few evaluations of state R&D tax credit programs have been conducted. Inspired by this lack of previous study, this study provided an empirical finding for the effectiveness of these programs by applying a quasi-experimental approach, which means conducting experiments without randomness, for comparing states with tax credits and states with no credits.For dealing with the embedded non-randomness, plausible other explanations that weaken the causal relationship between the programs and the effects were examined and ruled out as much as possible. Rival hypotheses were selected using different tax and government policies, overall business and R&D-specific environments, and firm characteristics. They were eliminated by constructing valid control groups, using the difference-in-differences and matching methods, selecting covariates and matching variables as observable variables, and absorbing year-specific fixed effects and cross-sectional-fixed effects as unobservable variables. The decision was made based on multiple estimates and multiple datasets. The research analyzed two sets of industries: the all industry group and high-technology industy.The major findings are : 1) state R&D tax credits positively affect the increase in R&D spending and increase in employment; 2) positive effects on R&D spending are widespread across the all industry group while positive effects on employment are limited to high-technology industry overall; 3) positive effects on R&D spending are also spread out to different sized firms in both the all industry group and high-technology industry; and 4) positive effects on employment are found mainly in large firms in both the all industry group and high-technology industry.The above findings support the utilization of state R&D tax credits. As an indirect intervention, state R&D tax credit programs can increase productivity and encourage innovation by generating additional private R&D activities. State R&D tax credit programs can also make a positive contribution to regional economic growth through the growth of R&D-relevant and high-technology industries.