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Economic Recovery Boost: State R&D Tax Credits Ignite Startups

by: The Knowledge Group

July 23, 2020

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In some underexposed recent news, an MIT research published in the Economic Development Quarterly shows research and development tax credits bring measurable boosts to new business. The work began before the COVID-19 crisis, and the long-term findings are relevant to our current need to create lasting jobs and sustain small businesses.

Federal R&D tax credits have existed for four decades. States adopted the idea after the nation did. In contrast to investment tax credits, which tend to promote big businesses, R&D credits nourish new growth. That said, research and development benefits can also boost major corporations with R&D departments. Large tech companies can and do tap into R&D tax credits to develop AI and other innovations.

The impact of tax credits takes years, not weeks, to assess, and the payoff does become clear over time, according to MIT economist Scott Stern. The MIT research looks not only at the creation of startups, but also at the strength of the new businesses over time, and the networks they influence.

Light Through the Tunnel?

Some positive signs are in view. Hiring appears to be on the rebound. Nonfarm payrolls are rising from their bleak low in April when the impact of stay-at-home orders on businesses became clear. Home property sales and construction work are currently showing strength. At the same time, we’re seeing spikes in new COVID-19 cases in Texas, Florida, and Arizona, and several other areas. Painfully, restaurants and bars have reopened only to close again.

States should bolster R&D tax credits for health tech, computing, research, and training, as part of a range of aids to help them forge paths to their recovery. Augmenting these credits would complement direct assistance to people from the federal government, should Congress begin the next phase of COVID-19 stimulus legislation to add to the payments made to taxpayers earlier this year. As we go to press, House Democrats have proposed a plan for further payments; Senate Republicans may do so soon.

Meanwhile, creative new companies are meeting needs arising from the pandemic. Focusing on what startups need to flourish matters now, on multiple levels.

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