Several so-called conservative think tanks and Department of Commerce officials have proposed taxing the income that universities earn from licensing their research discoveries supported by government grants. By effectively taxing research and development (R&D), the engine of growth, the proposals threaten to discourage innovation in semiconductors, energy, medicines, and other critical technologies. In addition, the government is already getting ample rewards from these R&D subsidies through its many other taxes on the incomes of the innovations generated.
R&D is essential to economic growth as innovation allows us to produce more with the same inputs. That’s why countries across the globe subsidize it including the U.S through tax exemptions and public research spending, including providing universities with research grants. The think tank proposals of this R&D tax would foolishly jeopardize this activity. The CATO Institute has suggested that the federal government should “demand a royalty” from universities that earn money from licensing patents that resulted from taxpayer-funded research. A more extreme proposal from the Brownstone Institute would repeal the Bayh-Dole licensing system altogether. They echo similar calls for R&D taxes from the Department of Commerce that has even surfaced taxing patents.
Universities are currently allowed to patent the discoveries that their researchers make with the help of these federal grants. Those patents can then be licensed to private companies in exchange for royalties that promote further discoveries.
This “tech transfer” system — created by the landmark 1980 Bayh-Dole Act — was designed to encourage this licensing. Prior to that law, universities had little incentive to patent or license the discoveries their researchers made with federal funding, since the government controlled the intellectual property rights on those discoveries. In other words, taxpayers were pouring money into scientific research. University labs were making impressive discoveries. But those discoveries weren’t transformed into useful products for tax-payers.
Most university technology transfer offices, like the one I participated in at The University of Chicago, have relatively meager licensing revenues, which total just a few billion annually in aggregate. This is far less than their importance of them for tech transfer activities. As they are the beginning of the highly uncertain innovation chain, they capture only a small fraction of the value generated. Technology transfer supports entire innovation ecosystems — startups, incubators, venture funds, and research parks — that grow up around major research universities and attract private capital at scale. Last year alone, university-driven research parks produced roughly $33 billion in federal tax revenue — an order of magnitude more than universities earn from licensing patents.
Naturally, if you tax something, you get less of it. Many universities would invest less in technology transfer and indeed 95% of tech-transfer experts warn that the policy would force universities to scale back or abandon licensing efforts altogether.
My direct experience as a managing partner in a VC firm suggests that startups and venture firms would be particularly hit as their deal-sourcing often relies on tech transfer offices. They lack the resources to monitor discoveries emerging from thousands of research labs nationwide and rely on offices surfacing promising breakthroughs.
By any measure, transfer offices have had great success. 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. In 2024 alone, 950 startups launched to commercialize academic research.
Some of those firms go on to reshape entire industries. The US biotech industry, the envy of the world, is largely driven by university discoveries and companies like Genzyme and Biogen grew out of this process. Google emerged from Stanford research licensed under Bayh-Dole. If the new proposals prevented even one company of this scale from forming, the lost tax revenue would dwarf any revenue the new R&D tax could conceivably raise.
It also defies common sense for the government to collect taxes on its own subsidies–to directly subsidize R&D only to then tax it back. Ending this inefficient “tax-spend-tax” process is a general issue and one reason why it was useful for President Trump to cut taxes on Social Security. Why collect distortive taxes to give out benefits only to tax back those benefits?
Supporters of these circular proposals say that the government should be rewarded for funding R&D, just as an initial private-sector investor would. Besides missing that total government revenue would fall from the reduced economic growth it also misses that the government already gets rewarded more than any private investor. The companies that license university research pay corporate taxes. Their employees pay income taxes. And their investors pay capital gains taxes.Meanwhile, university researchers pay taxes on the royalty income and any equity rewarded.
In other words, taxpayers are already earning massive royalties. At virtually every stage, the government collects a share of the total value created by the tech transfer process that’d make any venture capitalist green with envy.
If the government ever imposes these proposed taxes, it’d result in fewer startups, fewer jobs, and less and not more revenue flowing into the Treasury. Indeed, it’s hard to think of a more anti-growth proposal than taxing R&D.
This story was originally featured on Fortune.com
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