Strong economies are built on investment, and innovation helps drive that investment.
Innovation makes workers more productive and leads to new businesses that pay taxes and create jobs. But while the Lone Star State is renowned for its strong economy, investment in Texas research and development (R&D) remains distressingly low. That limits the growth of future-shaping companies and employers before they can even get started.
With the Texas Legislature now in session, it’s vital that legislators take on this issue by extending — and enhancing — the state’s innovation investment. One way to do this is through R&D tax credits, which reward companies that invest in Texas R&D by reducing their tax burden.
Texas offered this economic development incentive from 2000 to 2007, then shut it down for seven years. A smaller program started again in 2014, but it will end in 2026 unless the Legislature extends it.
Senate Bill 2206, filed by state Sens. Paul Bettencourt and Joan Huffman, both Republicans from Houston, and HB 4393, by state Rep. Charlie Geren, R-Fort Worth, would extend the program and adjust it so it is easier to administer. Yet even if this important legislation passes, our state’s R&D tax credit program will badly trail what is available in other states. Currently, Texas spends less on R&D relative to its population and state output than peer states do.
Our state’s tentativeness is surprising, given the clear benefits of R&D tax credits. A study by Rice University’s Baker Institute found that a strong R&D tax credit program could boost Texas’ economy significantly — increasing the state’s economic output by $1.3 billion in five years, $2.4 billion in 10 years, and $4.4 billion in 20 years, and consumer spending by $246 million in five years and $2 billion in 20 years.
Texans would reap the benefits as well. The Baker Institute study shows that R&D tax credits could create nearly 114,000 jobs in the first 10 years. With an average salary of $75,000, that adds up to more than $8.5 billion in wages.
Overall, the study estimates that the total benefits from R&D tax credits would be $14.6 billion after 10 years and $62 billion after 20 years.
By contrast, states that don’t invest in R&D see slower economic growth and lower standards of living. While other incentives like property tax breaks are more common, R&D tax credits benefit a wider range of businesses.
These investments also pay for themselves. The Baker Institute study examined a moderately sized R&D tax credit program that would cost $661.4 million in 2025 — and found that it would grow the Texas economy enough to cover this cost.
So, the question isn’t whether Texas can afford to extend the R&D tax credit; it’s whether Texas can afford not to.
Economic growth is the most important part of a healthy economy. It produces opportunity and improves living standards in each successive generation.
R&D tax credits help deliver that healthy growth. They also allow smaller, non-established businesses to gain a foothold and compete in the marketplace. As those smaller firms succeed, they create new opportunities for others. And, with a healthy ecosystem of innovation investment, there are always new, cutting-edge companies coming into the pipeline.
Texans rightly celebrate our state’s economic success over the past several decades. Innovation-focused programs, especially R&D tax credits, can ensure that success continues for future generations.
Extending the current program would help. Expanding it — especially to the point that it’s competitive with other states — would ensure that the state will thrive in the future as much as it has in the past.
John W. Diamond directs the Center for Tax and Budget Policy at Rice University’s Baker Institute; he was the lead author on the study of the economic effects of R&D tax incentives in Texas. Jennifer Rabb is president of the Texas Taxpayers and Research Association, which represents many of the state’s biggest employers.
