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State R&D incentive programs such as tax credits are widely used to stimulate innovation, attract investment, and support long-term economic growth. But how do we know which programs truly increase R&D activity rather than simply subsidizing what companies would have done anyway?

A recent paper published by SSRN provides a detailed look at the relationship between financial incentives and state fiscal health. The authors control for many potentially-related factors and still find significant, negative impacts of incentives. While the study helps fuel calls for critical analysis and careful implementation of tax incentives, the results may not be as clear cut as some coverage may suggest.

When the U.S. government made their R&D tax credit permanent in December 2015, it made a long-term commitment to using incentives to entice private firms to invest in research and development, joining many countries around the world. Although most studies find that R&D tax incentives promote R&D, there is little consensus on the extent of this effect. A recent firm-level analysis from the United Kingdom finds some of the strongest evidence to date on the effectiveness of R&D tax credits in incentivizing innovation. At the same time, however, other studies suggest other elements of a national economy such as education and infrastructure may be more important.

As the federal and state governments look for methods to support the creation and retention of well-paying science and tech (S&T) and manufacturing jobs, two recent reports have found that R&D tax credits play a vital role in helping keep domestic R&D-intensive firms resilient from economic downtowns and competition from emerging economics.