Representatives Ron Estes (R-KS.) and John B. Larson (D-CT) and Senators Todd Young (R-IN) and Maggie Hassan (D-NH) have introduced the American Innovation and Competitiveness Act (AICA). This law will make research and development (R&D) expensing permanent, a key tax provision that encourages investment, innovation, and job creation. All members of Congress should support and co-sponsor this important legislation.
Other members who support this bill include Reps. Jimmy Panetta (D-CA), Suzan DelBene (D-WA), Darin LaHood (R-IL), and Jodey Arrington (R-TX), and Senators Catherine Cortez Masto (D-NV.), Rob Portman (R-OH), and Ben Sasse (R-NE).
Currently, businesses can immediately deduct the costs of new investments including the cost of R&D. However, beginning in 2022, businesses will face a tax increase because they have to amortize R&D expensing over a 5-year period.
In fact, according to the Tax Foundation, allowing R&D amortization to go into effect would be a $100 to $120 billion tax hike over the next decade. It would be a significant blow to American businesses that would harm jobs, wages, and American competitiveness.
The American Innovation and Competitiveness Act will make R&D expensing permanent so that businesses can immediately deduct new expenses.
The pandemic has exposed the need to rethink U.S. supply chains over the medium and long-term so that we are not overly dependent on any one country. One of the best ways to achieve this is to ensure that we have appropriate policies to encourage research and development (R&D) in America.
R&D amortization harms American jobs. Jobs tied to R&D are quality, high paying jobs. In 2017, the average wage for R&D related jobs was $134,978 – 2.4 times higher than the average wage, according to the Bureau of Labor Statistics.
However, allowing R&D amortization to take effect will threaten these jobs, according to a study by Ernst and Young. The study estimates that annual US R&D spending will decline by $4.1 billion in the first five-year window and $10.1 billion annually thereafter.
This reduction in R&D spending will directly lead to 23,400 fewer jobs each year in the first five years and almost 60,000 jobs each year thereafter. After accounting for indirect economic effects, amortization would cost 67,700 jobs every year for the first five years and 169,400 jobs every year thereafter.
R&D amortization harms wages. According to a study by Ernst and Young, the United States R&D-related labor income would be reduced by $3.3 billion annually in the first five years and $8.2 billion annually in the second five years if this tax hike is allowed to go into effect.
When taking into account supply chains and consumer spending that would be negatively impacted, this tax hike would reduce labor income by $5.8 billion every year in the first five years and $14.4 billion every year thereafter.
Allowing businesses to immediately deduct the cost of all new investments, including R&D, is the right tax policy. Immediate expensing gives businesses the equivalent of a zero percent rate on new investments, which means that they have more money available to them to create jobs and increase pay. Additionally, it incentivizes businesses to invest in capital, which leads to stronger economic growth, more jobs, and higher wages.
Expensing for all types of assets simplifies the tax code by equalizing the tax treatment of new investments with other business expenses such as wages, rent, and healthcare costs.
If amortization of R&D goes into effect in 2022, R&D spending will be disadvantaged relative to other types of business spending, creating a disincentive to make these investments.
The U.S. already lags many foreign competitors in promoting R&D. While allowing R&D amortization to take effect will harm American competitiveness, we are already lagging behind when it comes to promoting R&D.
The UNESCO Institute for Statistics ranked the United States 9th in R&D investment. According to a Manufacturing Leadership Council study, the U.S. ranks 26th in R&D tax incentives when ranking the 36 developed countries in the Organisation for Economic Co-operation and Development (OECD).
While this low ranking is alarming, it is based on current U.S. policies, not what will happen if R&D amortization goes into effect. This ranking will almost certainly decline if R&D expensing is allowed to expire at the end of 2021.
Moving forward, we should be looking to policies to incentivize R&D. As part of this, lawmakers need to stop the looming tax hike on R&D and should support the American Innovation and Competitiveness Act to help American businesses invest and innovate.