BENDETT: REINSTATING RESEARCH AND DEVELOPMENT EXPENSING IS EXTREMELY IMPORTANT AND SHOULD BE A TOP PRIORITY
Research and development (R&D) and innovation have allowed the U.S. to reach great heights. From the domestic to global impacts of economic growth and quality jobs, R&D gives the U.S. a competitive edge over its rivals. Our ability to utilize technology and innovation that make our lives easier has helped solidify our status as an R&D world leader.
Since the 1950s, U.S. tax policy encouraged private-sector R&D. However, due to a change in the tax code that occurred after the implementation of the 2017 Tax Cuts and Jobs Act, the treatment of private-sector R&D expenses has shifted. Now, businesses, workers, the economy and our overall global competitiveness are at risk.
The old policy was simple: businesses that participated in R&D activities were permitted to deduct 100 percent of those expenses from their tax bill in one of two ways. The first way is known as “full expensing,” allowing businesses to deduct their R&D expenses in the same year they were incurred. The other option is known as “amortization,” allowing businesses to deduct their R&D expenses over a period of five years.
The new policy eliminated the option of full expensing, instead forcing all businesses to deduct their R&D expenses slowly over a period of either five years for U.S. expenses, or 15 years for international expenses. As a result of this change, the landscape for R&D and the associated impact on the economy, competitiveness and jobs is murkier than ever.
On a domestic level, the immediate impact of this dissonance has already been seen in businesses across the country. After years of being able to immediately offset the cost of their investments in R&D, many small- to medium-sized local businesses found themselves drowning in an unprecedented sea of tax bills this past spring. With limited cash reserves, there is still no clear way for businesses to be able to pay these bills.
In the long term, the new U.S. tax policy will deal a blow to private-sector R&D investments. Businesses of all sizes will be forced to dial back on what they’re spending on R&D. This will result in a reduction that will shrink the gross domestic product by $45 billion over the next 10 years and result in the loss of more than 400,000 otherwise stable jobs in that same timeframe.
This is a problem that will be acutely felt right here in New York state. For years, our state has had a bustling R&D economy—in fact, the sixth strongest in the nation. Buoyed by technology and manufacturing businesses, private-sector R&D expenditures here are nearly $18 billion, a figure that supports thousands of jobs. And in the key northeast region of New York, New Jersey and Pennsylvania, R&D spending is worth $30 billion to the U.S. economy.
On an international scale, our R&D sector puts us at an advantage over other countries, including those that we currently have rocky relationships with such as China. We must do all we can to maintain this competitive edge, particularly in the face of China enacting policies to further incentivize their own R&D that could allow them to dominate the global economy in the future.
Over the last 20 years, China has vastly expanded their R&D work, which has culminated in the country trailing only us in global R&D. And with their R&D output having grown at almost double the rate of ours over the last 13 years, their share could soon surpass us. The fact that their up to 200 percent super deduction on R&D expenses has made their tax incentive nearly six times more favorable than our post-amortization incentive is even more reason to make the U.S. R&D expensing a top priority.
The support and organization behind correcting this issue is strong. It includes a bipartisan mix of 30-plus members in the Senate and 110-plus members in the House who are cosponsoring R&D expensing legislation. It also includes collective support from businesses and the workforce, whether in the technology, pharmaceutical, manufacturing or telecom industries. The recognition among so many about the harm amortization can and will cause is what has helped organize consecutive sessions and voiced the call for change. Now is the time for action.
It is my hope Congress will move quickly, and U.S. leaders will work diligently to make the necessary changes as soon as possible. Restoration of full expensing must be a top priority. Domestically, our businesses, workers, and economy need the support, and globally, R&D expensing will help guarantee the U.S. maintains its competitive standing.
Scott Bendett represents New York’s 107th Assembly District.
