Beggar Thy Neighbor? The In-State vs. Out-of-State Impact of State R&D Tax Credits

FRB of San Francisco Working Paper No. 2005-08

52 Pages Posted: 14 Jun 2005

See all articles by Daniel J. Wilson

Daniel J. Wilson

Federal Reserve Bank of San Francisco

Date Written: May 2005

Abstract

In this paper, I exploit the cross-sectional and time-series variation in R&D tax credits, and in turn the user cost of R&D, available from U.S. states between 1981-2002 to estimate the elasticity of private R&D with respect to both the within-state (internal) user cost and the out-of-state (external) user cost. To faciliate comparisons to previous studies of the R&D cost elasticity, I first estimate an R&D cost elasticity omitting external R&D costs; the estimated elasticity is negative, above unity (in absolute value), and statistically significant - a finding quite similar to that found by previous studies based on alternative data. Unlike previous studies, however, I then add the external R&D user cost to the regressions. I find the external-cost elasticity is positive and significant, raising concerns about whether having state-level R&D tax credits on top of federal credits is socially desirable. More importantly, I find the aggregate R&D price elasticity - the difference between the internal- and external-cost elasticities - is far smaller than previously estimated. In fact, the preferred specification yields a zero aggregate elasticity, suggesting a zero-sum game among states and raising questions about the efficacy of R&D tax credits more broadly.

Keywords: R&D tax credits, R&D price elasticity

JEL Classification: H25, H23, O18, O38

Suggested Citation

Wilson, Daniel J., Beggar Thy Neighbor? The In-State vs. Out-of-State Impact of State R&D Tax Credits (May 2005). FRB of San Francisco Working Paper No. 2005-08. Available at SSRN: https://ssrn.com/abstract=741265 or http://dx.doi.org/10.2139/ssrn.741265

Daniel J. Wilson (Contact Author)

Federal Reserve Bank of San Francisco ( email )

101 Market Street
Mail Stop 1130
San Francisco, CA 94105
United States

HOME PAGE: http://www.frbsf.org/economics/economists/dwilson.html

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