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State-Level R&D Tax Credits: A Firm-Level Analysis

Author

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  • Paff Lolita A

    (Penn State Berks - Lehigh Valley College, lap21@psu.edu)

Abstract

California’s changes in R&D tax credit rates on biopharmaceutical and software firms’ research investment during 1994-1996 and 1997-1999 is compared using two approaches. Consistent with the federal research tax credit literature, the difference-in-differences analysis provides some evidence of increased R&D expenditure in response to research tax credit rate increases. In contrast, the estimated tax price elasticities obtained by computing and testing the tax prices for in-house research are dramatically higher than the existing literature’s estimates near unity. Possible explanations include firms’ greater sensitivity to state-level policy, industry factors, sample characteristics and measurement error. For contract research with universities and other not-for-profit research organizations, the findings suggest a tax credit may not be the optimal policy tool. Finally, state-level R&D incentives do not appear to have equal incentive effects across industries.

Suggested Citation

  • Paff Lolita A, 2005. "State-Level R&D Tax Credits: A Firm-Level Analysis," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-27, September.
    • Handle: RePEc:bpj:bejeap:v:topics.5:y:2005:i:1:n:17
    DOI: 10.1515/1538-0653.1272
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    Keywords

    R&D; Tax Credit; Research Policy;
    All these keywords.

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