In February 2025, the National Institutes of Health (NIH) proposed a cap on indirect costs for federal grants. This move could significantly affect the funding landscape for research institutions across the country, and it’s important to understand the economic consequences of this change. In particular, the cap could reduce the indirect costs that are vital to covering overhead expenses associated with research activities.

What are indirect costs?

Indirect costs, often referred to as overhead costs, cover the essential infrastructure and services that support research. These include things like staff salaries, facility maintenance, utilities, and administrative support. These costs are typically not itemized in individual grant proposals but are negotiated between research institutions and federal agencies.

The NIH proposal seeks to restrict indirect costs to 15% of a research grant’s total amount, which would limit the funds that institutions can use to cover these essential operational expenses.

Data Findings: A Snapshot of Economic Impact

To better understand the impact of this cap, IMPLAN economist Bjorn Markeson, Ph.D., analyzed the potential economic losses across states, based on calculations from a recent New York Times article. While the findings should be viewed as the potential contributions of lost indirect payments to state economies (rather than traditional economic impacts), they help illustrate the potential ripple effects of this funding shift.

“These numbers paint a stark picture of the unintended consequences of capping indirect costs. This isn’t just about tightening budgets—it’s about undermining the infrastructure that makes groundbreaking research possible. A $6.1 billion hit to GDP and the loss of 46,000 jobs isn’t just an abstraction; it means fewer scientists in labs, fewer innovations reaching the market, and a weakened research ecosystem. If institutions are forced to cut back, we risk not only slowing scientific progress but also damaging the broader economy in ways that will be difficult to reverse,” says Markeson.

Overall Economic Losses

In 2024, NIH awarded approximately $36.7 billion in research grants. The proposed cap on indirect costs would result in a $5.5 billion reduction in these funds annually. The overall economic impact of this loss, when taking into account supply chain effects and household expenditures, is estimated to be a $6.1 billion decrease in Gross Domestic Product (GDP), along with a $4.6 billion reduction in labor income. Additionally, this loss could affect over 46,000 jobs nationwide.

Breaking Down the Effects

• Direct Effects: These are the immediate consequences tied to research activities themselves. Direct effects contribute about $2.4 billion to GDP, $2.4 billion in labor income, and support around 17,000 jobs.
• Indirect Effects: These refer to business-to-business expenditures across the research and development supply chain. Indirect effects add roughly $1.8 billion to GDP, $1.1 billion in labor income, and support an additional 14,000 jobs.
• Induced Effects: These effects stem from household spending by those employed in research and related industries. Induced effects result in a $1.9 billion impact on GDP, $1.0 billion in labor income, and contribute to 15,000 jobs.

Broader Implications: Occupations at Risk

The proposed cuts to indirect costs could disproportionately affect jobs in research and its supporting sectors. Some of the top occupations at risk include:

• Software Developers: 1,000 jobs
• Medical Scientists: 937 jobs
• Natural Science Managers: 800 jobs

Beyond the research sector, other industries that indirectly rely on the research economy may also feel the impact. For instance, jobs in general management, fast food services, retail, and office clerks could see declines as institutions cut back on spending. Some of these occupations affected include:

• General Managers: 1,190 jobs
• Fast Food Workers: 574 jobs
• Retail Salespersons: 567 jobs
• Office Clerks: 545 jobs

What does this mean for states?

The potential for lost indirect funding is not just an issue for research institutions but has far-reaching effects on local economies. States with significant NIH funding could see considerable drops in GDP and labor income, particularly in regions heavily reliant on research-driven industries. As institutions adjust to these cuts, they may have to make difficult decisions, such as reducing expenditures in other budget areas, generating new revenue, or even eliminating research initiatives altogether.

A Call for Mitigation Efforts

While the proposed cap on indirect costs represents a shift in federal funding policy, the effects of such changes are not inevitable. Institutions can implement mitigation strategies to offset the financial impact. This could include restructuring their budget allocations, increasing fundraising efforts, or finding new ways to maintain critical research infrastructure without sacrificing vital research programs.

The analysis highlights just how interconnected research funding is with local economies, and how shifts in federal funding policies can have widespread consequences. As these discussions continue, it is crucial for stakeholders to understand the broader economic ramifications and explore solutions to minimize the negative impacts on research and the communities that rely on it.

For more details on the proposed NIH funding changes and navigating their economic impact, check out the IMPLAN webinar, Showing the Impact of University Research Funding.