To encourage innovation, Congress should pass two bills protecting important R&D tax provision

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Politicians on both sides of the aisle have expressed a desire to bring the country together and work on a bipartisan basis to help the economy recover as we emerge from the COVID-19 pandemic.

If they are serious about this goal, they must act to protect an important tax provision that encourages American innovation, manufacturing, and competitiveness.

Currently, businesses can immediately deduct the costs of new investments, including costs associated with research and development (R&D). But starting at the end of the year, businesses will effectively face a tax increase on R&D by being forced to amortize (or deduct) R&D costs over a 5-year or 15-year period.

Unless lawmakers act, businesses across the country will see a significant tax increase on this investment. According to the Tax Foundation, forcing businesses to amortize new R&D costs would be a tax hike of $100 to $120 billion over the next decade.

If allowed to go into effect, this tax hike will reduce new investments that help create jobs, raise wages, and make America globally competitive and innovative.

The American Innovation and Jobs Act and the American Innovation and R&D Competitiveness Act was developed by Sens. Maggie Hassan (D-N.H.) and Todd Young (R-Ind.) and Reps. John Larson (D-Conn.) and Ron Estes (R-Kan.) to stop this tax increase. We are grateful to these lawmakers for introducing commonsense and bipartisan legislation, something that is all too rare in Washington these days.

There is strong support for this important legislation from Democrats and Republicans across the country including Reps. Jimmy Panetta (D-Calif.), Suzan DelBene (D-Wash.), Darin LaHood (R-Ill.), and Jodey Arrington (R-Texas), and Sens. Catherine Cortez Masto (D-Nev.), Rob Portman (R-Ohio), and Ben Sasse (R-Neb.).

The bill would stop the loss of 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.

But this economic damage is only the beginning. It would also harm suppliers and reduce consumption. When this is taken into account, this tax hike would actually eliminate almost 68,000 jobs per year in the first five years and 170,000 annual jobs thereafter.

Allowing businesses to immediately deduct the cost of all new investments, including R&D, is the right tax policy.

For example, the $288 billion equipment manufacturing industry owes much of its success and global competitiveness to R&D. Equipment manufacturers spend their days analyzing how to improve existing product offerings and solve market problems.

The tax code allows them to use those credits to invest into R&D and keep their pricing competitive vis-à-vis foreign competitors. But perhaps most importantly, it allows equipment manufacturers to spend time on projects where the return on investment is untested or unclear. These projects are often the ones that makes the biggest impact.

This tax treatment is not a giveaway to equipment manufacturers or other businesses. The tax code rightly allows immediate expensing for all types of assets — a provision that simplifies the tax code by incentivizing all investments and putting them on a level playing field with other business expenses such as wages, rent, and health care costs.

The United States already lags many foreign competitors in promoting R&D. 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.

For the country and the economy to recover from the pandemic, we need policies that strengthen innovation and competitiveness for manufacturers and businesses across the country. As part of this goal, lawmakers should pass the two bipartisan bills to stop the looming tax hike on R&D and ensure U.S. businesses can compete and thrive in the global economy.

Kip Eideberg is senior vice president of government and industry relations at the Association of Equipment Manufacturers. Alex Hendrie is director of tax policy at the nonprofit group Americans for Tax Reform.

Tags Ben Sasse Catherine Cortez Masto Darin LaHood Jimmy Panetta Jodey Arrington John Larson Maggie Hassan Research and development Rob Portman Ron Estes Suzan DelBene Todd Young

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