TX-Texas Moves to Strengthen R&D Tax Incentives with New Legislation

Texas is taking steps to enhance its research and development (R&D) tax structure, aiming to stay competitive with other states that offer more generous incentives. With equipment manufacturing being a capital-intensive industry with high R&D investment, Texas lawmakers are considering updates to its tax credit system through SB 2206 and HB 4393.

Currently, Texas offers a franchise tax credit and a sales tax exemption for qualifying research activities, but these incentives lag behind other states. Texas ranks 33rd in R&D investment as a percentage of gross state product (GSP), a situation attributed to outdated and inefficient tax policies. Comparatively, California and Michigan offer significantly higher credits for R&D expenditures, particularly for businesses collaborating with universities.

SB 2206 and HB 4393 propose making Texas’ R&D tax credit permanent, simplifying its administration, and tying it directly to federal reporting on IRS Form 6765. The updated structure would offer an 8.72% credit for general R&D expenditures and a 10.903% credit for new R&D within Texas, with the credit capped at 50% of a business’s franchise tax liability.

According to a study by Texans for Innovation, expanding the R&D tax credit could generate over 113,000 jobs and $8.5 billion in wages by 2035. Over two decades, Texas could see a net economic gain of $58.8 billion, with the expanded incentives effectively paying for themselves.

As the Texas Legislature debates these bills, industry advocates stress the importance of modernizing R&D tax incentives to attract investment and prevent the state from falling behind in innovation.

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