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November 11.2025

2 Minutes Read

Why States Should Embrace R&D Expensing to Boost Corporate Tax Revenue

States Don’t Need to Penalize Research & Development to Preserve Corporate Income Tax Revenue

Understanding the Impact of R&D Tax Policies

State lawmakers are facing a critical juncture regarding corporate income tax policy as they navigate the complexities introduced by the One Big Beautiful Bill Act (OBBBA). This legislation has important ramifications for how research and development (R&D) expenditures are treated, particularly concerning immediate expensing. Historically, states embraced these expensing provisions to incentivize R&D investments. However, as some states contemplate decoupling from OBBBA, it is vital to recognize what such a shift could mean for the corporate tax landscape and innovation.

The Benefits of Full Expensing for R&D

The recent reintroduction of immediate expensing for domestic R&D costs under OBBBA, effective from tax years beginning after December 31, 2024, could substantially benefit state economies. By allowing businesses to fully deduct R&D expenditures in the year incurred, states have the opportunity to stimulate innovation and attract investment. This was a pivotal element prior to the TCJA's changes, and reinstating it could further fortify the corporate tax base without penalizing businesses for investing in innovation.

Potential Consequences of Decoupling

Decoupling from the OBBBA could lead states to miss out on the long-term economic benefits of fostering a strong R&D environment. While some lawmakers argue that conformity could erode corporate tax revenue, the evidence suggests that since the TCJA, federal corporate income tax collections have increased significantly per point of the tax rate. This indicates that businesses can thrive and contribute to a robust tax base when incentivized, rather than penalized, for investing in R&D initiatives.

Global Perspectives on R&D Taxation

The international landscape also highlights the importance of competitive tax policies. Countries worldwide are increasingly offering generous R&D tax credits and expensing provisions to attract and retain businesses. States contemplating decoupling from OBBBA may find themselves at a disadvantage, as firms could opt to invest in jurisdictions with a more favorable tax environment. Thus, maintaining alignment with such federal policies may be essential for retaining economic competitiveness.

Looking Ahead: The Path to Positive Change

As we move closer to the implementation of OBBBA's provisions, states have the chance to re-evaluate their tax strategies toward R&D expenses. Creating policies that promote immediate expensing could not only support businesses but also enable states to enhance their overall economic resilience. Ultimately, the choice of whether to preserve these advantages or revert to more restrictive measures could define a state’s innovation landscape for years to come.

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Why States Should Embrace R&D Expensing to Boost Corporate Tax Revenue

Understanding the Impact of R&D Tax Policies

The Benefits of Full Expensing for R&D

Potential Consequences of Decoupling

Global Perspectives on R&D Taxation

Looking Ahead: The Path to Positive Change

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