“Without the tax credit, we would be at a huge competitive disadvantage with other companies building lithium projects in states that do have it,” said Kelly Lugar, executive vice president of government relations at EnergyX. That sentiment echoes Opportunity Austin’s focus on fostering “economic prosperity through innovation, investment, and collaboration.”
Achieving this involves ensuring the Austin region is an appealing place for companies to relocate or expand. And an important part of that growth often relies on either the development and creation of new products, or improvements to existing products and processes.
What is the R&D Tax Credit?
Started in 2014, the Research & Development (R&D) tax credit incentive is designed to encourage companies to invest in building new and improved products and technologies by giving them a tax credit on qualified R&D expenses.
The current program benefits companies through either franchise tax credits or a sales tax exemption. However, many companies, like startups, struggle to qualify for franchise tax credits, and administrative burdens for the sales tax piece cause inefficiencies for companies and the state.
The biggest problem with the current credit is that it expires on Dec. 31, 2026. As a result, the legislature must extend this program for the R&D tax credit to continue being an economic engine for the state.
How important is this program to the economy? An economic impact study by the Texans for Innovation coalition (which Opportunity Austin is a proud member) estimates that “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.” Overall, the study estimates the total benefits from R&D tax credits would be $14.6 billion after 10 years and $62 billion after 20 years.
So, the question isn’t whether Texas can afford to extend the R&D tax credit; it’s whether Texas can afford not to.
Legislative Proposals
Opportunity Austin supports SB 2206 by Senator Paul Bettencourt and HB 4393 by Representative Charlie Geren to reauthorize the R&D tax credit during the 89th Texas Legislative Session. These bills extend the tax credit program and enhance it through a more streamlined process.
Unfortunately, this program is one area where Texas significantly lags other states. Failing to pass this legislation means Texas will be even less competitive on a national and global scale. It also means Texans might see their jobs disappear and other companies will lose business from customers who no longer have capital to purchase equipment or supplies.
Under the proposals, Texas will continue to offer a Franchise Tax Credit for “qualified research expenses.” For simplicity, the Texas credit will be tied to amounts reported on standard IRS forms, reducing paperwork.
The amount of the credit would be 8.72% or 10.903% (depending on different factors) of new R&D in Texas. The bills also limit the total amount of credit that can be claimed in a given year, so carryovers are allowed for a certain length of time.
One of the more interesting provisions is a refundable credit for businesses who are below the “no tax due threshold” and new veteran-owned businesses. This provision loops in startups and small businesses who have a desire to re-invest in their business but couldn’t access those benefits under the previous tax credit program.
Summary
While the state has many programs to incentivize economic growth, the R&D tax credit is unique in that it applies to businesses of all sizes and is designed to help business reinvest in their own growth and success. Opportunity Austin and the Texans for Innovation coalition see the expiration of the current R&D tax credit program as an opportunity to enhance the effectiveness of the tax credit rather than merely extending it.
Passing either SB 2206 or HB 4393 will implement a tax credit program projected to create nearly 114,000 jobs in the first ten years and generate more than $8.5 billion in wages. This program helps Texas remain the premier state to do business in the nation by reinvesting in the businesses and people that helped build that success.
