Fact of the Week: Implementing an R&D Tax Credit Increases a State’s Rate of Business Formation by 7.5 Percent

Source: Catherine Fazio, Jorge Guzman, and Scott Stern, "The Impact of State-Level R&D Tax Credits on the Quantity and Quality of Entrepreneurship," NBER Working Paper 23099, July 2019.

Commentary: Proponents of R&D tax credits argue that reducing the costs businesses face to innovate encourages them to invest more into R&D. A recent study of county-level data between 1990 and 2010 provides evidence to support this argument. Controlling for differences between counties and economic trends, the study finds that states which enact an R&D tax credit see a 7.5 percent increase in the formation of new businesses. Further, it finds that these benefits compound over time, with states that leave their tax credit in place for 10 years seeing their rate of business formation grow by 20 percent.