Maximizing Growth: Insights from the 2025 International Tax Competitiveness Index

Avoiding R&D Penalties: The Case for Corporate Tax Revenue Growth

Update Maximizing Revenue: The Importance of Preserving Corporate Tax Benefits With the recent discussions around decoupling from the One Big Beautiful Bill Act (OBBBA), which mandates certain business expensing provisions, states are faced with a critical decision regarding their corporate tax policies. Lawmakers must balance concerns over preserving corporate income tax revenue while avoiding penalties on vital research and development (R&D). Understanding the context of corporate tax revenue growth since the Tax Cuts and Jobs Act (TCJA) in 2017 is where a deeper analysis reveals the benefits of conformity with OBBBA. A Decade of Increased Corporate Tax Revenue Growth Since the TCJA took effect, the corporate tax base has expanded dramatically. The flat rate of 21% established under the TCJA allowed states to capture a broader tax base without instituting extensive rate reductions. Recent analysis notes that prior to the TCJA, state corporate tax collections averaged $10.88 billion per percentage point; this figure increased to $19.30 billion per point after the TCJA's implementation. The backdrop of tax legislation, including OBBBA, indicates a consistently high revenue trajectory, suggesting that decoupling from provisions supportive of R&D may not be necessary for maintaining revenue growth. Cost Considerations: Frontloaded vs. Long-Term Benefits Expensing provisions under OBBBA incur immediate costs due to frontloaded deductions, particularly affecting states' short-term revenue. However, analysis demonstrates that although these costs appear significant initially, they lead to substantial long-term benefits, both for businesses and state economies. By conforming to enhanced business expensing provisions, states can encourage R&D and foster innovative industries, ultimately contributing to sustained economic growth and increased revenue in the future. The Historical Rollback of Investment Incentives The introduction of five-year amortization for R&D expenditures under § 174 marks a departure from established tax policy that allowed immediate deductions for R&D investments since 1954. As many states impose penalties on R&D expenditures during this transition, they risk stifling innovation and curtailing the long-term competitiveness of their economies. A historical perspective underscores that dedicating resources to research has universally proven beneficial in enhancing state tax revenues and promoting economic advancement. Counterarguments: The Risks of Decoupling Opponents of conformity often warn about potential corporate tax revenue erosion; however, the evidence suggests that the integrity of tax rules guiding R&D spending remains critical. Implementing such penalties against businesses may fundamentally undermine the policy goals of supporting domestic innovation and economic growth. Moreover, with corporate tax revenues remaining strong post-TCJA, the argument against conformity fails to recognize that decoupling could lead to long-term consequences that are detrimental to state economies. Emphasizing Investment in Research and Development Promoting a state tax structure that aligns with R&D incentives not only complements the philosophies behind the OBBBA but also aligns with broader state economic development goals. By reverting to a tax structure that allows immediate deduction for R&D under state codes, lawmakers can reinforce their commitment to innovation and diversification of their economic base. Historically, businesses have thrived in environments promoting research investment, and states benefit from the resulting growth in jobs and economic activity. Conclusion: A Call to Action for Policymakers As states deliberate on decoupling from the OBBBA, it is essential for policymakers to recognize the critical role of R&D tax benefits in stimulating innovation and economic growth. Instead of pursuing measures that could penalize corporate investment, states should consider maintaining conformity with provisions that enhance the business landscape. Ensuring that R&D expenditures are eligible for immediate deductions will foster a culture of investment and innovation, ultimately resulting in fitting returns for the state in the form of increased corporate tax revenues in the long run.