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Are Research and Development Tax Credits Effective? The Economic Impacts of a R&D Tax Credit in New Hampshire

PFM, Vol. 8 No. 1, (2008)

This paper uses detailed study of a proposed research and development (R&D) tax credit in one U.S. state, New Hampshire, to gain insight on an important public finance issue: the motivations for and the economic costs and benefits of R&D tax credits. The paper reviews the policy considerations and assesses the potential economic impacts of enacting a proposed R&D tax credit in New Hampshire in 2006. Policy analysis and formal economic modeling of the economic costs and benefits of alternative R&D tax credit policies are provided for New Hampshire. This includes estimates of the potential employment and personal income gains, changes in R&D investments, and tax revenue costs. The review of the state R&D tax credit policies and the New Hampshire modeling and simulations support the view that a R&D tax credit policy can have a positive impact on a state’s R&D investments, employment and income growth. It also highlights, however, that the net fiscal effect can be negative and that the aggregate (national) welfare effects are not adequately considered and require further inquiry.

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