Tech Alert: University Research Taxes: A Fatal Mistake?

Various expert groups and officials have proposed taxing the income that universities earn from licensing their research discoveries funded by the government.

This measure, which would essentially tax research and development (R&D), could discourage innovation in critical areas such as semiconductors, energy, and medicine. The government already benefits from these R&D subsidies through the taxes it levies on the income generated by innovations.

R&D is crucial for economic growth as it allows us to produce more with the same resources. That is why countries around the world subsidize it, including the U.S. through tax exemptions and public spending on research, including grants to universities.

The CATO Institute has suggested that the federal government should "demand a royalty" from universities that earn money from licensing patents resulting from taxpayer-funded research.

A more extreme proposal from the Brownstone Institute would seek to completely revoke the Bayh-Dole licensing system. These proposals add to the calls for R&D taxes from the Department of Commerce, even to tax patents.

Universities are currently allowed to patent discoveries made by their researchers with the help of these federal grants. Those patents can then be licensed to private companies in exchange for royalties that promote new discoveries.

The 1980 Bayh-Dole Act was a milestone that incentivized licensing, as before this law, universities had little incentive to patent or license the discoveries of their researchers funded with federal funds.

In other words, taxpayers were investing money in scientific research, but those discoveries were not translated into useful products. The law changed this, allowing universities to benefit from their research and encouraging technology transfer to the private sector.

Technology transfer supports entire innovation ecosystems: startups, incubators, venture funds, and research parks that grow around major research universities, attracting private capital on a large scale.

Licensing revenues are relatively modest, totaling only a few billion annually, but their importance for technology transfer activities is enormous.

Last year alone, research parks driven by universities generated approximately $33 billion in federal tax revenue, an order of magnitude more than universities earn from patent licensing.

Since 1996, university technology transfer has directly contributed nearly $2 trillion to U.S. gross industrial output and almost 20,000 companies have formed around university-licensed technologies.

Many universities would invest less in technology transfer and 95% of technology transfer experts warn that the policy would force universities to scale back or abandon licensing efforts altogether.

Startups and venture capital firms would be particularly affected, as their deal sourcing often relies on technology transfer offices. They lack the resources to monitor discoveries emerging from thousands of research labs nationwide and rely on offices that detect promising breakthroughs.

If the government imposes these proposed taxes, it would result in fewer startups, fewer jobs, and less revenue for the Treasury. It is hard to think of a more anti-growth proposal than taxing R&D.