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To increase industry R&D state governments should align state R&D tax credits with the Federal Alternative Simplified R&D tax credit.

Studies show that the research and development tax credit is an effective way of stimulating private-sector R&D. Moreover, state R&D tax credits appear to be even more effective than the federal credit. While 38 states in 2006 linked their R&D tax credits with the federal R&D tax credit, allowing firms to take a 20 percent credit on increased R&D funding, many states have not updated their tax code to link to the increased Alternative Simplified Credit, which rose from 12 to 14 percent.