ABSTRACTThis study empirically examines the impacts of legal constraints and aggregate individual characteristics on the funding and expenditure related to states' research and development (R&D). A system generalized method of moments (GMM) analysis is performed over a 20‐year period (2000–2019). The budgetary institutions, including rainy‐day funds, TELs, and debt limitations, significantly affect states' overall innovative capacity and R&D spending. They can hinder improvements in states' innovative capacity and R&D expenditure. On the other hand, states can circumvent these institutions and increase their R&D intensity and spending. States' development and human capacity foster their innovative capacity and R&D spending. Catholic work ethic is also crucial for enhancing state governments' innovative capacity and R&D expenditure. Legislative term limits reduce states' R&D intensity and expenditure. Meanwhile, economic downturns may motivate additional spending on R&D activities to promote states' innovative capacity and R&D spending. Fiscal burdens can prevent states from investing in R&D.