Opinion: Adopting a state research and development tax credit would be wasteful and counterproductive

Daniel Hauser and Nhi Nguyễn

Hauser is deputy director of the Oregon Center for Public Policy. Nguyễn is a policy analyst with the Portland-based center.

We all want Oregon to prosper. We all want our state to be the home of innovation. To achieve that, public policies must be based on facts.

A recent opinion in The Oregonian/OregonLive (“Oregon must step up its game to boost state’s competitiveness,” March 12) disregards the facts when calling on the Legislature to adopt a new research and development tax credit to attract federal CHIPS Act funding. Not only does Oregon’s own experience with a previous program demonstrate that such a tax credit is an ineffective use of public resources, but federal guidance suggests that an R&D tax credit is the wrong way to compete for CHIPS Act dollars.

Oregon used to have an R&D tax credit called the Qualified Research Activities tax credit, but the Legislature chose not to renew it in 2017. There was not enough evidence the tax credit caused companies to undertake research they wouldn’t already do. At a legislative hearing reviewing the credit in 2015, a Tektronix executive admitted, “would Tektronix be doing anything different in its business if it did not have a credit on its books? I would say no. I’ll be on record saying that.”

Letting the credit expire was the correct decision. Even without it, industry spending on research and development in Oregon continued climbing, based on our organization’s review. In 2017, the last year the Qualified Research Activities tax credit was in place, businesses spent $7.8 billion in R&D in Oregon. In 2020, the year with the most recent data, that figure rose to $10.2 billion, a 30% increase.

Oregon consistently ranks near the top in industry R&D spending as a share of the private-sector economy. In 2017, our state ranked fifth in the nation, with private companies spending 3.8% of private gross domestic product on research and development, based on our analysis of research spending and economic data. That rose to 4.7% in 2020, pushing Oregon to fourth place despite having no R&D tax credit. Washington, the state that ranked first, let its R&D tax credit expire in 2015.

Not only would reinstating an R&D tax credit be wasteful, it would be counterproductive. The U.S. Commerce Department has given guidance on the kind of state incentive packages it’s looking for when reviewing applications for CHIPS Act funding. Commerce seeks packages “that improve regional economic resilience and support a robust semiconductor ecosystem, beyond assisting a single company.” So it will favor “investments in workforce, education, site preparation, or infrastructure,” while placing “less weight on . . . direct tax abatements.” Stated differently, Commerce is looking for investments in people and place, rather than business tax subsidies like an R&D tax credit.

Ignoring the federal guidance, proponents of reinstating the tax credit say that for the tax credit to work it just needs to be bigger than the prior, failed version. But such claims fly in the face of the evidence: Oregon and Washington have excelled in attracting R&D investment without a state tax credit.

While it’s questionable that a bigger state tax credit would increase research investment beyond what would already occur, it’s indisputable that a bigger tax credit would siphon money away from schools and other essential services that serve all Oregonians. That is especially true if lawmakers make the tax credit available to any company, not just semiconductor companies. The old tax credit cost Oregon more than $150 million since 2010, and one of the new proposals brought forward by legislative leaders could cost as much as $100 million each year.

The facts are clear: reinstating an R&D tax credit would be wasteful and counterproductive. The right approach for Oregon is to invest in Oregonians and our shared infrastructure.