Thanks to a flurry of legislative activity that took place in April, Tax Day could be less burdensome in the future for residents of a number of states. On April 28, Montana Governor Greg Gianforte (R) signed into law the largest income tax cut in his state’s history. Just over a week later on May 6, the South Carolina House passed a bill that would put the state on track to having a flat 1.99% income tax rate, down from a 6.2% top rate today. That move in South Carolina came three weeks after the North Carolina Senate passed a budget that would cut the state’s 4.25% flat tax to 1.99% in the coming years if revenue triggers are met. Three days before the North Carolina Senate passed that income tax-cutting budget, the Oklahoma Senate gave final approval to legislation that will gradually phase out the state income tax.
In this era of heightened state tax competition, lawmakers in Texas recognize it’s unwise for even a no-income-tax state to rest on its laurels. They demonstrated as much last week with the Texas Senate’s unanimous passage of Senate Bill 2206, legislation that would both extend and strengthen the state’s research & development tax credit. Senator Paul Bettencourt (R), sponsor of SB 2206, calls it a “huge win for innovation.”
“We’re increasing the R&D franchise tax credit from 5% up to 8.722% — and even higher to 10.903% for R&D with Texas universities and colleges,” Senator Bettencourt posted to X following the Texas Senate’s 31-0 vote in favor of SB 2206. The bill now awaits consideration in the Texas House. Representative Charlie Geren (R) is sponsor of HB 4393, the House companion to SB 2206.
“For every $1 in R&D incentive, Texas gains $12.47 in Gross State Product over 20 years,” Senator Bettencourt added. “This bill creates 6,662 new jobs annually, $445M in labor income, and $748M in GSP growth every year. SB 2206 ensures Texas remains a national leader in research, innovation, and job creation — making sure our economy keeps pace with the demands of the 21st-century.”
“Research and development (R&D) activities of private businesses, universities and the government are important for increasing innovation,” noted John Diamond, the director of the Center for Public Finance at Rice University’s Baker Institute for Public Policy, in a 2024 paper. “Sustained increases in economic growth and the standard of living will be primarily driven by technological innovation in the near future, making it imperative that Texas act to increase R&D investments.” Diamond points out that one way to do this is by “extending and increasing the R&D tax credit,” which is what will happen if the Texas House passes HB 4393.
“R&D is so important to a healthy economy,” Jennifer Rabb, president of the Texas Taxpayers and Research Association, told the Austin American-Statesman. “And without an extension of the credit, companies are going to choose to go elsewhere for those projects.”
“Texas’ credit is on the low end of the spectrum for R&D tax incentives, with countries like China offering a ‘super deduction’ of 200% and states like California offering a 15% tax credit on qualified research expenditures and an extra 24% of research payments to public universities and their affiliate hospitals or cancer research centers,” the Statesman reported after the April 10 Senate Finance Committee hearing on SB 2206. “Many other states, like Michigan and Arizona, offer 10%.”
“For those businesses, small entrepreneurial businesses that are startups that don’t have income coming in, they would be able to take a credit off of their sales tax expenditures to use it or carry forward the credit to a time when they have profits coming in,” Glen Hammer, CEO of Texas Association of Business, told the Statesman, adding “it’s something that’s available to all innovative companies in the state of Texas, regardless of their size.”
The push to extend and boost the R&D tax credit in Texas coincides with the effort on Capitol Hill to reinstate full year one business expensing for R&D costs. The enactment of SB 2206/HB 4393 in Texas “needs to be complemented with Congress ending the tax code’s bias against research spending,” says Ryan Ellis, president of the Center for a Free Economy.
“For the whole history of the tax code, research expenses (which consist mostly of the wages paid to researchers) were deductible,” adds Ellis, an IRS-enrolled agent who also runs a tax preparation firm. “As of 2023, research expenses incurred in one year must be slowly deducted. Congress is working as we speak to restore full research expensing, the neutral and correct tax policy which is also very pro-growth.”
“The United States treats research and development poorly compared to the rest of the world,” the Tax Foundation noted in an October 2024 paper. “Historically, the US allowed companies to fully deduct R&D costs, but since 2022, companies must deduct R&D expenses across 5 years or 15 years. In real terms, the delay means companies only deduct around 89 percent of R&D costs, creating a tax penalty.”
Researchers at the Tax Foundation, as illustrated by the below chart, have concluded that improving the tax treatment of R&D, in particular restoring full expensing of R&D costs, is among the most effective ways to promote economic growth.
Congressional leaders are aiming to send a bill to the President’s desk by this summer that would prevent the personal income tax cuts enacted in 2017 from expiring, while restoring full expensing of R&D, along with full expensing of other business costs. The Texas House Ways & Means Committee, meanwhile, will take up HB 4393 during a hearing on May 12. This eighty-ninth regular session of the Texas Legislature will conclude on June 2.
