WASHINGTON (June 2, 2021)—Following the passage of the Tax Cuts and Jobs Act (more common­ly known as the tax reform) in 2017, there was a significant increase in private sector research and development (R&D) focusing on energy and environmental issues. Prior to the tax reform, private sector energy and environmental R&D was fairly stagnant. Now, with Congress and the Biden administration considering increasing corporate tax rates as a means to pay for a new infrastructure plan, the broader implications of tax reforms and their effects on R&D—especially within the energy and environmental space—must be considered.

In a new policy study, R Street Resident Senior Fellow of Energy and Environmental Policy Philip Rossetti examines how tax policy incentivizes the private sector to invest in innovation in the United States.

“The tax reform is the most probable reason for a significant increase in private sector energy and environmental R&D, as demonstrated by a $3.3 billion increase in energy and environmental innovation investment in 2018. Overall, private sector energy and environmental R&D outweighs publicly funded energy and environmental R&D by a factor of over seven to one, so policies that result in even modest increases in privately funded innovation can increase net economy-wide investments at greater volumes than public spending,” said Rossetti.

There is not enough data to say how big of an impact specific pieces of the tax reform had on private-sector innovation. However, the fact that there was a notable response to the tax reform means that policymakers should be cautious when considering paying for energy or environmental priorities with corporate rate increases or other taxes on capital investment as those changes may be counter-productive to overall energy and environmental investment and innovation.

Read the full policy study here.