Commerce Secretary Howard Lutnick recently proposed that the federal government should claim half of university royalties from discoveries that come from federally funded research, no matter how small the grant is. This move is yet another example of what some view as the Trump administration’s confusing economic policies, raising quite a bit of concern.
Lutnick is advocating for a 50% tax on patent royalties as a way to “protect taxpayers.” But, honestly, how does this protect taxpayers when the returns seem minimal, and there’s a risk of causing greater economic damage? It appears there’s pressure to increase these royalty taxes, especially since excessive taxation often stifles innovation.
Without getting too deep into the details, his suggestion seems to dismantle one of the most effective innovation policies in U.S. history. Since the bipartisan Bayh-Dole Act of 1980, the government has largely stepped back from claiming rights to patents born from federal research funding. That legislation enabled universities and individual researchers to retain licensing royalties. Most of this income usually gets funneled back into labs and scholarships, aimed at fueling ongoing research and development.
Does this mean taxpayers aren’t benefiting from the hundreds of billions in research grants each year? Quite the opposite. By granting universities the ability and motivation to license research to the private sector, the Bayh-Dole Act led to the emergence of numerous startups, creating millions of jobs and contributing significantly to technological advances.
Contrary to his intentions, Lutnick’s plan would likely do more harm than good for taxpayers. It risks reverting us to a pre-Bayh-Dole scenario where research funds go to waste, and life-saving innovations hibernate in academia without ever reaching the market.
Before the Bayh-Dole Act, the federal government held patents on discoveries stemming from taxpayer funding. However, poorly managed licensing efforts meant many patents didn’t lead to any real products or further research.
A 1998 report indicated that only a small fraction of patents held by federal agencies were actively approved. The government lacked the expertise needed to develop, manufacture, and market innovative goods.
At the same time, universities that made these breakthroughs had little incentive to pursue private partnerships that could turn their ideas into practical applications.
Lawmakers like Birch Bay and Bob Doll worked across party lines to enact reforms that handed universities the ownership and licensing of patents. This change unleashed a wave of economic growth over the following decades.
From 1996 to 2020, universities’ efforts to license patents led to the creation of over 19,000 startups, which collectively produced approximately $1.9 trillion in industrial output and supported 6.5 million jobs.
These ventures contribute significant tax revenue year after year. The tangible results of this system are everywhere, from advancements in healthcare to innovations like Google’s algorithms. The Bayh-Dole Act has been integral to these successes.
In essence, taxpayers are already reaping substantial rewards from research through tax revenues generated by thriving companies and high-earning employees, alongside the life-saving impacts of healthcare innovations.
Taxing university license revenues—essentially lowering the incentive for collaboration with private sectors—could jeopardize this entire framework.
The United States consistently ranks as a leader in innovation worldwide. One European business school highlighted that in 2024 alone, over 80,000 new companies were registered, underscoring the nation’s position as the most dynamic ecosystem for entrepreneurship globally. The Bayh-Dole Act has played a crucial role in maintaining this status.
Interestingly, the Bayh-Dole Act already encompasses what Lutnick seems to desire: a system where taxpayers benefit from the success of government-funded research—not through government intervention, but through the collaboration between universities and the private sector to create jobs and drive innovation.
