Texas Bolsters Research and Development Tax Credit, Indicating Continued Focus Beyond Low Tax Rates
Let's Dish on the Dynamic Tax Scene Shaping Up in 2025
Montana, South Carolina, and North Carolina raise their glasses to tax cuts, while Texas boosts Research & Development efforts
It's a bustling season for state tax reform, with Montana, South Carolina, and North Carolina recently slashing income taxes, and Texas aiming to strengthen its research and development (R&D) tax credit.
Montana's Record-Breaking Tax Slasher
Montana Governor Greg Gianforte (R) made history by signing the state's largest income tax cut into law on April 28, 2025.
South Carolina's Income Tax Makeover
Just over a week later, the South Carolina House passed a bill to progressively lower the state's income tax rate, aiming to drop the top rate from 6.2% to an eventual 1.99%.
North Carolina's R&D-Focused Budget
Three weeks before South Carolina's move, the North Carolina Senate passed a budget that eyes a reduction in the state's 4.25% flat tax to 1.99%, given that certain revenue triggers are met. This budget has a particular emphasis on Research and Development (R&D).
Oklahoma's Phasing Out Income Tax
Three days before the North Carolina Senate vote, the Oklahoma Senate gave final approval to legislation that will phase out the state income tax.
Texas: Stepping Up the R&D Game
In this era of increased state tax competition, lawmakers in Texas have recognized the importance of not resting on their laurels. Last week, the Texas Senate unanimously passed legislation, Senate Bill 2206, aimed at extending and strengthening the state's R&D tax credit program. The bill now heads to the Texas House for consideration.
"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 Paul Bettencourt (R), sponsor of SB 2206, shared on X following the Texas Senate's 31-0 vote in favor of the bill.
The Science Behind the SB 2206
John Diamond, the director of the Center for Public Finance at Rice University's Baker Institute for Public Policy, underscored the importance of R&D activities for innovation, economic growth, and maintaining a high standard of living in a 2024 paper. Diamond maintains that extending and increasing the R&D tax credit is an effective method of boosting innovation in Texas.
Jennifer Rabb, president of the Texas Taxpayers and Research Association, emphasized the significance of R&D in maintaining a healthy economy. Rabb cautioned that failure to extend the credit could prompt companies to locate their innovation projects elsewhere.
The Austin American-Statesman reported that Texas's R&D tax credit, although relatively generous, lags behind some other states and countries' incentives, with the Chinese R&D tax credit offering a "super-deduction" of 200% and California offering a 10% tax credit on eligible research expenditures, among other incentives.
International Competition for R&D Dominance
Countries such as Canada, Australia, and various European Union members offer substantial R&D tax incentives, with some providing refundable credit components or higher credit rates for collaborative projects. To remain competitive in the global innovation landscape, Texas's proposed R&D tax credit extension is in line with broader international trends.
Ultimately, the financial impact of such incentives can be significant. This reflects the delicate balance between the goals of economic development through R&D incentives and the fiscal responsibility required for long-term sustainability.
Stay Tuned for Updates
As the 89th regular session of the Texas Legislature continues through June 2, the Texas House Ways & Means Committee will take up HB 4393 during a hearing scheduled for May 12. On Capitol Hill, efforts are underway to restore full expensing for R&D costs, with congressional leaders aiming to send a bill to the President's desk by summer.
In this fast-paced tax landscape, it's an exciting time for those keeping an eye on the fiscal policies shaping the innovation landscape, both in Texas and nationwide.
- In both Texas and in the broader national context, there's a growing focus on enhancing Research & Development (R&D) tax incentives for attracting business investments and technological advancements.
- To remain competitive with other states and countries, such as Canada, Australia, and various EU members, who offer substantial R&D tax incentives, Texas lawmakers are working towards addressing the extension and strengthening of the state's R&D tax credit program.
- As the Texas Legislature continues its 89th regular session through June 2, the House Ways & Means Committee will consider HB 4393 during a hearing scheduled for May 12, seeking to restore full expensing for R&D costs.
- In parallel, on Capitol Hill, congressional leaders are working to restore full expensing for R&D costs, with an aim to pass a bill before the summer season.
- As this transition unfolds, the tax landscape becomes increasingly dynamic, particularly in terms of sustainable fiscal policies, corporate taxation, and business tax reforms aimed at attracting Research & Development investments.
