Young Op-Ed: Congress Should Restore R&D Tax Deductions to Help US Compete
By Todd Young
The following opinion column was originally published in Bloomberg Tax on May 10, 2023.
A bipartisan Senate bill to restore a deduction for research and development expenses and expand R&D tax incentives would allow American businesses to innovate and compete on a global scale, says US Sen. Todd Young (R-Ind.).
Tax Day was particularly challenging for American job creators this year. During recent visits with Indiana employers of different sizes, operating in different industries, I heard similar anxieties: unexpectedly high tax bills may result in job cuts, canceled expansion plans, or businesses taking on new loans to survive.
My Senate colleagues are no doubt hearing similar things from their own constituents. If not, they certainly will soon.
Last year, Congress failed to extend a provision in the tax code allowing American employers to immediately deduct R&D expenses. For the first time in 70 years, businesses now must amortize these investments over the course of five years, rather than 100% of it annually.
In a country known for growing and making things based on research and development by the world’s brightest minds, we are making it too expensive to invest in R&D.
This now-expired deduction wasn’t a loophole or a means to help businesses avoid paying taxes. It provided companies with much-needed liquidity to invest, hire, and expand.
The loss of first-year deductibility of R&D expenses isn’t just devastating to our small and fledgling businesses whose innovations keep our economy strong and growing. It also significantly weakens America’s position in our global competition with China.
China currently provides a 200% “super deduction” for R&D expenses that amounts to 20 times the amount allowed in the US tax code. A manufacturing company in China that spends $100 on R&D gets to deduct $200. Even before this provision expired, the US ranked 27th out of 37 OECD countries with respect to R&D incentives. Our strategic competitors know this and are taking advantage.
To reverse course and preserve American competitiveness, Sen. Maggie Hassan (D-N.H.) and I recently introduced the American Innovation and Jobs Act to restore and expand R&D tax incentives to preserve American competitiveness globally. Specifically, our bill would:
- Restore incentives for long-term R&D investment by ensuring that companies can fully deduct R&D expenses each year
- Raise the cap over time for the refundable R&D tax credit for small businesses and startups
- Expand eligibility for the refundable R&D tax credit so that more startups and new businesses can use it
Our bill has strong and growing bipartisan support, with 24 other current cosponsors in the Senate and more expected to join. The sooner we pass this legislation the better. For some businesses, the loss of full R&D deductibility has resulted in staggering increases in taxes—up to 400% in some cases.
Smaller firms or startups simply can’t afford to pay this innovation tax while also investing in new products and expanding their workforce.
What is the consequence of failing to act? The array of industries and products impacted by the change to the tax code is vast. It includes agriculture, life sciences, transportation, infrastructure, military hardware, clean energy technology, and the manufacture of the software and microchips that animate these things or make their production possible.
Reductions in R&D across these fields means decreased yields on our farms, fewer life-saving medicines and devices in our hospitals, less safety and efficiency coming out of our automotive plants, greater delays to modernization of our bridges and roads, and less of the advanced military hardware necessary to equip our soldiers.
And, of course, as the discovery and production of these products wanes, America’s workforce contracts. One analysis showed that wages and salaries make up 75% of R&D spending, indicating that higher R&D costs will lead to reduced employment.
Small-to-medium size manufacturers, who are most helped by the R&D deduction, account for 60% of all manufacturing jobs in the nation. With resources diverted away from hiring engineers and towards sending checks to the IRS, that number will shrink. If the R&D deduction goes unrestored, it could cost 263,000 jobs and $82.4 billion in gross domestic product yearly.
And this lowered productivity and loss of workers will take place at the end of a supply chain crisis, in the middle of historic inflation, and with the looming threat of recession.
Washington has found a rare bipartisan consensus regarding the need meet China’s global leadership challenge. But our rhetoric is inconsistent with our actions. We can’t charge America’s innovators with outcompeting China’s and then purposely disadvantage them in that contest. That is a formula for defeat.
If we want to out-compete and out-innovate the Chinese Communist Party, we must pass the American Innovation and Jobs Act as soon as possible. We cannot allow another Tax Day to pass without the restoration of this critical tax provision.
Todd Young represents the state of Indiana in the US Senate. He currently serves on the Senate Finance Committee.
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