Texas Makes Bold Move to Boost Innovation Economy
In a unanimous vote, the Texas Senate Finance Committee has advanced Senate Bill 2206, a crucial piece of legislation aimed at extending and enhancing the state's Research and Development (R&D) tax credit program, which is currently set to expire on December 31, 2026. The bill, introduced by Sen. Paul Bettencourt, R-Houston, alongside its companion House Bill 4393 from Rep. Charlie Geren, R-Lake Worth, proposes a significant improvement to the existing incentive structure, increasing the current tax credit from approximately 5% to 8.72%.
Additionally, the legislation includes a special provision offering up to 10.9% credit for new R&D activities associated with Texas public and private higher education institutions, encouraging greater collaboration between industry and academia.
“R&D is so important to a healthy economy,” said Jennifer Rabb, president of the Texas Taxpayers and Research Association, in an interview with the American-Statesman. “And without an extension of the credit, companies are going to choose to go elsewhere for those projects.” Source
Texas Falls Behind in R&D Investment
Despite its reputation as one of the most business-friendly states in the nation and ranking as the second-largest state economy, Texas has struggled to attract proportionate R&D investment. According to research from Rice University's Baker Institute, Texas ranks 33rd nationally in R&D investment relative to its gross state product (GSP), with a ratio of just 1.78%.
The disparity is even more pronounced when examining business-funded R&D: As of 2022, Texas contributed only 4.3% to U.S. business-funded R&D, despite accounting for 9.3% of national economic output. In stark contrast, California dominates with 36.2% of the nation's business-funded R&D. This imbalance places Texas behind not only California but also Washington (9.2%), Massachusetts (7.1%), and New York (4.9%) in terms of R&D investment. Source
“Texas lags in R&D investment, ranking 33rd when compared to other states using the gross state product (GSP) measurement,” notes John W. Diamond, Ph.D., Edward A. and Hermena Hancock Kelly Senior Fellow in Public Finance and director of the Center for Tax and Budget Policy at Rice University's Baker Institute. “The implication is clear. The question is not whether Texas can afford to extend the R&D tax credit, but instead whether Texas can afford not to extend the R&D tax credit.” Source
A Decade of Innovation Support
The Texas R&D tax credit program, established in 2014 through House Bill 800, has provided meaningful support to the state's innovation ecosystem. The program allows qualifying entities to choose between a sales tax exemption on personal property used for research or a franchise tax credit based on research expenses.
According to data from the Texas Comptroller's Office, the program has facilitated approximately $2.8 billion in claims since its inception, with $412.7 million claimed in fiscal year 2024 alone. This demonstrates the program's significant usage and importance to businesses conducting research in the state. Source
Competitive Landscape Drives Reform
A key motivation behind the proposed enhancement is Texas's need to remain competitive in the global race for R&D investment. The current Texas incentive structure falls behind many competitors:
California offers a 15% tax credit on qualified research expenditures plus an additional 24% of research payments to public universities and their affiliate hospitals or cancer research centers. China provides an even more aggressive incentive with its “super deduction” of 200%, allowing companies to deduct twice the value of their R&D expenses from their taxable income. Other U.S. states like Michigan and Arizona offer 10% credits, placing Texas at a competitive disadvantage with its current 5% rate. Source
“Competitively speaking, we don't have the highest tax credit available to R&D folks,” said Tony Bennett, president and CEO of the Texas Association of Manufacturers. “You absolutely have to have R&D going on in your industry sector to remain globally competitive, or you will be out of business.” Source
Broad Coalition Supports Enhanced Incentives
A diverse alliance of business and industry organizations, operating under the coalition Texans for Innovation, has emerged as a strong advocate for the extension and enhancement of the R&D tax credit. This coalition includes prominent organizations such as the Texas Association of Manufacturers, Texas Association of Business, Texas Healthcare and Bioscience Institute, Texas Taxpayers and Research Association, Texas Chemistry Council, Texas Oil & Gas Association, Texas Economic Development Council, several municipal chambers of commerce, Opportunity Austin, and major corporations like Lockheed Martin.
“With the current R&D tax credit set to expire in 2026, the Partnership is joining a broad coalition of business leaders known as Texans for Innovation,” states a recent announcement from the Greater Houston Partnership, highlighting the unified business community support behind the initiative. Source
Glenn Hamer, President and CEO of the Texas Association of Business, emphasizes the inclusive nature of the credit: “For those businesses, small entrepreneurial businesses that are startups that don't have income coming in, they would be able to take a credit off of their sales tax expenditures to use it or carry forward the credit to a time when they have profits coming in. What we love about this credit is that it's something that's available to all innovative companies in the state of Texas, regardless of their size.” Source
Economic Impact Projections
A comprehensive economic impact study commissioned by Texans for Innovation presents compelling evidence for the long-term benefits of extending and enhancing the R&D tax credit. The research, conducted by John W. Diamond of Rice University's Baker Institute, projects substantial economic growth from the proposed changes:
By 2035, the study estimates the enhanced tax credit could:
- Create approximately 113,850 new jobs
- Generate $8.5 billion in wages
- Increase Texas's gross state product by up to 0.13%
- Boost total investment by 0.25% in the first year, with continued growth over the long term
The study also suggests that the expanded incentive would benefit businesses of all sizes, from large corporations to small startups and entrepreneurial ventures, by providing sales tax exemptions and allowing unused credits to be carried forward. Source
Fiscal Considerations and Next Steps
While the proposed expansion could result in an estimated $661.4 million loss in tax revenue for fiscal year 2026, proponents argue that the long-term economic gains would more than offset this cost. The study projects that over 20 years, Texas could see a net economic gain of $58.8 billion after accounting for revenue offsets from increased economic activity, particularly from property and sales taxes. Source
Sen. Donna Campbell, R-New Braunfels, while voting in favor of the bill, raised a cautionary note, suggesting that the Legislature should consider whether Texas has too many business tax incentives or if it should moderate the state's rapid growth pace. Despite this concern, the bill passed committee unanimously with 13 ayes and no nays. Source
Having successfully cleared the Senate Finance Committee, SB 2206 now moves to the Senate floor before heading to the House for further consideration. Meanwhile, HB 4393 remains in committee.
The Path Forward
The advancement of the R&D tax credit legislation represents a crucial step in Texas's strategy to maintain its economic leadership while adapting to an increasingly innovation-driven global economy.
“It's a must pass,” declared Glenn Hamer of the Texas Association of Business. “We need to extend the R&D tax credit to remain competitive when it comes to R&D investment. So many other states, dozens of other states, have an R&D tax credit… In terms of for the economic health of Texas, this is imperative.” Source
As the bill continues through the legislative process, its passage could mark a pivotal moment in Texas's economic development strategy, potentially transforming the state's position in the national and global innovation landscape while creating substantial economic opportunities for Texans across the state.
