A handful of incentives designed to make Virginia’s economy more innovative have largely failed to drive economic growth, according to a state report presented to lawmakers on Monday.
Lawmakers have gradually expanded tax breaks to encourage Virginia companies to invest in research and development, with tax breaks topping $27 million in the 2020 fiscal year. But the new report from the legislature’s research arm, the Joint Legislative Audit & Review Commission, found the program doesn’t spur much economic growth compared to other types of incentives, particularly grant or loan programs.
Ellen Miller, JLARC’s chief economic development analyst, told lawmakers that grants often work better than tax incentives because the state has more say in how they operate.
"They’re better targeted, they’re discretionary, and they typically all have some minimum level of activity, like job creation, that is required,” Miller said.
The latest report builds on a series of findings from JLARC showing mixed results for state incentives ranging from workforce development to film subsidies. The commission previously found the state spent $3 billion on economic development incentives from 2011 to 2020, the majority of which were either tax credits or tax exemptions. About 28% of that came from a single program: a tax exemption for data centers that JLARC says saves the companies over $100 million a year. In a 2019 report, JLARC called that incentive “relatively effective” and said it generates “moderate economic benefits.”
One goal of the science and technology incentives is to wean Virginia’s economy off its traditional reliance on the federal government and make it more dynamic. To that end, lawmakers expanded a program focused on research and development in 2016. But its impact has been mixed, according to state researchers.
"R&D tax credits help businesses increase R&D spending, particularly smaller businesses,” Miller told lawmakers in her presentation. “Virginia's R&D tax credits, though, are too small to meaningfully affect overall statewide R&D activity. Increasing the credits, however, would not substantially improve business R&D activity."
Miller said other drivers, like the economy and mix of industry, play a bigger role.
The report also reviewed a tax credit program for so-called angel investors who are investing in early-stage companies. Just 6% of people who received the credit had entrepreneurial experience, according to JLARC, which found the program offered negligible return on investment. The commission recommended lawmakers consider scrapping that program as well as narrowly targeted tax subsidies focused on space companies using a launchpad on Wallop’s Island.
Two programs focused on investing in startups offer more promising results. A program now known as Virginia Venture Partners offered a 60% higher rate of return compared to its initial investment and earned JLARC’s highest scores for job creation. That program and another, now called the Commonwealth Commercialization Fund, also helped startups grow, JLARC found, though the latter program offered a lower return on investment compared to other state incentives.
The report noted Virginia lags on several measures of entrepreneurial vitality when compared to other states. For example, when it comes to the number of patents per capita, Virginia ranks 27th in the nation.
State subsidies have steadily grown over the last decade. The trend is likely to continue as the state pays out a $750 million grant to Amazon beginning in 2026. That grant requires the company to create over 37,000 jobs and invest at least $2 billion in its second headquarters in Northern Virginia.
This story was produced with assistance from the Public Media Journalists Association Editor Corps funded by the Corporation for Public Broadcasting, a private corporation funded by the American people.
