Secretary Lutnick’s Royalty Grab: Bad for America—and the Administration

Commerce Secretary Howard Lutnick is urging the White House to turn a proposal he floated into an Executive Order that would weaken the economy and cost the government tens of billions of dollars in foregone tax revenue. It’s bad policy, and even worse politically. The Trump Administration would be wise to reject it.

Secretary Lutnick is convinced that the government is being short-changed when academic institutions make patentable inventions under federal grants, which are primarily licensed to entrepreneurial small companies that take great risk and expense to turn them into real-world products. The Secretary wants the government to seize 50% of the royalties that universities receive when resulting products are sold—sales that bolster our economy while promoting public well-being.

Past is Prologue

Before 1980, the “problem” that worries Lutnick didn’t exist. That’s because few new products resulted from the billions of dollars that the government invested annually in academic research. The reason was simple. The government took the patent rights on discoveries, destroying the incentives needed for commercialization. As a result, nearly 27,000  inventions gathered dust in Washington and not a single new drug was developed.

The bipartisan Bayh-Dole Act changed all that. It allows universities, federal laboratories, and small companies to own inventions they make from federally funded research. And just as importantly, it allows them to earn royalties from licensing those patents to private companies that want to further develop the technologies.

Universities, not the government, incur substantial costs in patenting inventions, defending them from challenges in court, and seeking out private firms interested in licensing the discoveries. Royalty income allows those expenses to be met.

Bayh-Dole catalyzed an innovation revolution that continues to this day. On average, academic discoveries create between two and three new companies and two new products every day. No other country comes close to having this impact from government funded R&D, but China is working feverishly to clone this model and overtake our lead.

The most amazing thing is that all this happened without any increased costs to hard pressed taxpayers—which is why The Economist Technology Quarterly once called the Bayh-Dole Act “possibly the most inspired piece of legislation to be enacted in America over the past half-century … More than anything, this single policy measure helped reverse America’s precipitous slide into industrial irrelevance.”

Lutnick’s Plan Would Gut Bayh-Dole Boon

The law mandates how university royalties must be used. For one, they can pay the considerable costs of technology management that the government does not cover. They must also be used to reward the academic inventors who made the discoveries. Without that incentive system, breakthrough inventions like immunotherapy for treating cancer, high-definition video and audio, the nicotine patch and firefighting drones would be research papers, not products.

Finally, the law mandates that any money left over be used to fund more research, leading to new discoveries driving our economy.

Under Lutnick’s proposal, the Bayh-Dole engine would run dry, as the dollars needed to support technology transfer would be seized by the government for an undefined slush fund. And those most likely to suffer are red states where university research is a critical driver of the regional economy. For most schools, technology transfer is a cost, not a profit center. Academic institutions in the heartland are least likely to have the required discretionary income to maintain their commercialization programs if Sec. Lutnick’s royalty grab is implemented.

Ironically, the proposal would cost the government money. According to the most recent data, academic institutions generated about $3.6 billion in royalties in 2023. It often takes nearly a decade for these royalties to generate, and most academic inventions are never commercialized so their costs accrue. But Sec. Lutnick sees royalties as all profit and argues the government deserves half. At best, his proposal would raise $1.8 billion in annual revenue.

The most widely accepted estimate of the economic impact of U.S. academic patent licensing shows a $1 trillion impact on U.S. gross domestic product over 25 years. That comes to $40 billion a year. Additionally, 6.5 million U.S. jobs were created. That comes to 260,000 jobs per year. A conservative estimate shows that activity generates over $6 billion in federal tax revenue—or 330% more than Lutnick’s idea would realize.

And that’s very much a low ball estimate. Academic research parks, innovation districts, and technology hubs benefitting from Bayh-Dole generate $33 billion in federal tax revenue every year.

Thus, the licensing tax will forfeit far more federal revenue than it raises—all while depressing the economy. That’s why Congress removed a “government payback” provision when passing Bayh-Dole. History shows they were correct.

Royalties would fall under Lutnick’s proposal because many universities would be forced to curtail their licensing efforts as the government would siphon away the money needed to pay their costs. Under Lutnick’s idea, academic institutions would likely focus on licensing low hanging fruit, avoiding the breakthrough, high risk technologies which take many years to license and many more before they become royalty generating products. Yet these are precisely the inventions which are critical for maintaining our lead in our technological race with China.

Worse Than a Crime

Reflecting on a critical blunder in Napoleonic France, Minister Charles Maurice de Talleyrand-Périgord allegedly quipped: “It was worse than a crime, it was a mistake.” The proposed royalty grab is one of those rare ideas which harms all parties involved. Ironically, Lutnick’s idea hits the states hardest that are crucial for Republican chances of holding onto Congress in the 2026 election. That’s a mistake the White House would be wise to avoid.

Let’s hope the Administration does some basic homework before they adopt a proposal that pushes the economy—and the GOP—over the cliff. If not, they have no one but themselves to blame.

Image source: Deposit Photos
Author: studiostoks
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