AUSTIN, TEXAS – A newly released economic impact study, commissioned by Texans for Innovation, found that extending the state’s research and development (R&D) tax credit will increase economic output, employment, and income, without creating fiscal problems at the state or local level. Specifically, the tax credit would create more than 113,000 jobs and generate $13.8 billion in additional Gross State Product (GSP) in the first 10 years. Texans for Innovation, a coalition of leaders that span the major business and industry sectors of the state, is calling on the Texas Legislature to extend the R&D tax credit due to expire in 2026 to grow the economy and cement Texas’ position as a leader in technology and innovation.

Legislation filed this week, SB 2206 by Senator Bettencourt and HB 4393 by Representative Geren, would offer a Franchise Tax credit for qualified research expenses that will encourage R&D investment across the state, according to Tony Bennett, president and CEO of the Texas Association of Manufacturers and a founding member of Texans for Innovation. 

“For many industries like manufacturing, high-tech, energy, and biotechnology, the R&D process represents the critical ‘first phase.’ It’s where questions, ideas, and problems are fleshed out in labs, the field or production facilities to become the products and solutions that power the Texas economy,” said Bennett.  “These industries are the driving force in Texas’ economic growth and job creation and the state should be doing all it can to encourage growth in the sectors that are innovating the future of Texas. We appreciate Senator Bettencourt and Representative Geren for their leadership in this critical issue.”

“Investing in R&D is essential for Texas to maintain its status as a top destination for innovation, business growth, and high-quality jobs,” said Jennifer Rabb, president of the Texas Taxpayers and Research Association. “However, despite being the second-largest state economy, Texas lags behind other states in R&D investment. To bridge this gap and secure a competitive advantage, expanding and strengthening R&D tax incentives is not only beneficial but necessary.”

John W. Diamond, Ph.D., Edward A. and Hermena Hancock Kelly Senior Fellow in Public Finance and director of the Center for Tax and Budget Policy at Rice University’s Baker Institute, lead author of the study, said, “Our research demonstrates that an R&D tax credit will pay for itself by increasing the size of the Texas economy by more than enough to offset the cost of the incentive. The implication is clear. The question is not whether Texas can afford to extend the R&D tax credit, but instead whether Texas can afford not to extend the R&D tax credit. Extending the R&D tax credit at its current  level is a first step, and it will definitely have a positive impact on the Texas economy, but a significant increase above the current level, whether now or in the future, is necessary if Texas wants to lead the nation in innovation and growth.”

Key findings from the study include:

Texas Lags in R&D Investment

• Despite being the second-largest state in population and GSP, Texas lags in R&D investment, ranking 33rd as a percentage of GSP.
• Texas’ existing R&D tax incentives have been intermittent and comparatively modest.
• As of 2022, Texas contributed only 4.3% of U.S. business-funded R&D, well behind leading states like California (36.2%).
• This gap suggests that Texas’ R&D policies need strengthening to remain competitive nationally and globally.

Economic Benefits of Enhanced R&D Tax Incentives
Expanding and making R&D tax credits permanent will generate significant economic benefits:

• GSP growth: Texas’ GSP could increase by up to 0.13% in the long run.
• Job creation and wages: By 2035, Texas could see 113,850 new jobs with an estimated $8.5 billion in wages.
• Investment boost: Total investment is projected to rise by 0.25% in the first year, with continued growth over the long term.

Revenue Offsets and Fiscal Responsibility

• While the initial cost of expanding R&D tax credits is estimated at $661.4 million in FY2026, the economic benefits will offset these costs over time.
• Increased economic activity will lead to higher state revenues, particularly from property and sales taxes, minimizing fiscal impacts.
• The study estimates that over 20 years, Texas could see a net economic gain of $58.8 billion after accounting for these offsets.

Study Author’s Policy Recommendations for Texas Lawmakers

• Extend and increase R&D tax credits beyond 2026 to foster a stable, long-term environment for innovation.
• Make these credits permanent to reduce uncertainty for businesses and attract more R&D investment to the state.

“With key R&D incentives set to expire, Texas risks losing ground to other states in research and development spending,” said Glenn Hamer, president and CEO of the Texas Association of Business. “Extending these incentives is critical to attracting high-tech industries, creating jobs, and maintaining Texas’ position as a national leader in technology and innovation. Ensuring long-term support for R&D strengthens our economy, workforce, and overall competitiveness.”

Members of Texans for Innovation include the Texas Association of Manufacturers, Texas Association of Business, Texas Healthcare and Bioscience Institute, Texas Taxpayers and Research Association, Texas Chemistry Council, Texas Oil & Gas Association, Texas Economic Development Council, Dallas Regional Chamber, Greater Houston Partnership, North Texas Commission, Opportunity Austin and Lockheed Martin.

Read the full study here.