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CONGRESS MUST IMMEDIATELY REVERSE AMORTIZATION OF RESEARCH AND
DEVELOPMENT (``R&D'') EXPENSES
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HON. JOHN B. LARSON
of connecticut
in the house of representatives
Thursday, February 3, 2022
Mr. LARSON of Connecticut. Madam Speaker, I rise to address an urgent tax policy matter.
At the start of this year, a key bipartisan tax policy ended. It had been around for nearly 70 years. For nearly 7 decades American taxpayers had been able to immediately deduct R&D expenses.
What has changed since the beginning of 2022, Madam Speaker? Taxpayers are now required to deduct R&D expenses over a period of years. This spread-out deduction is what is known as amortization.
What does it mean, Madam Speaker? Expenses would be recovered more slowly. To those innovative businesses cash flow will be reduced. Reduced cash flow means less dollars for R&D. Smaller R&D budgets will harm R&D activity in the United States. That's the effect of increasing the tax burden borne by those innovating businesses.
Will there be a loss of jobs, Madam Speaker? The answer is yes. One study concludes the job losses would total over 20,000 jobs in the first five years. As bad as that is, the same study concludes job losses would be three times as much in the second five years. We're talking about 60,000 jobs lost.
How will this change affect U.S. global competitiveness, Madam Speaker? The answer is it will hurt U.S. competitiveness abroad. If allowed to remain in effect, the U.S. policy of amortization would treat innovation-related expenses worse than any other developed country. Prior to amortization going into effect, the U.S. was already ranked 27th of 37 OECD countries with respect to R&D incentives. If amortization remains, things get worse. In effect, the U.S. will fall further behind our competitors when it comes to incentivizing R&D.
If Congress fails to delay amortization before March 31st, the first quarter of 2022, businesses will be forced to act. Estimated cash tax payments will increase by more than $8 billion in just the first quarter alone. The effect will be an immediate reduction in capital that can support R&D. Of prime concern to Congress should be the loss of more than 20,000 direct R&D jobs this year without our action.
A four-year delay of amortization is included in the House-passed Build Back Better legislation and the initial Senate substitute. I would have hoped we would already have addressed this issue, but while progress on that legislation awaits final disposition in the Senate, Congress must begin to consider whatever is the fastest path to enactment because time is of the essence.
One option would be the two pieces of legislation designed to address China competition. The House is considering the America Creating Opportunities for Manufacturing Pre-Eminence in Technology and Economic Stability (``America COMPETES'') Act of 2022. Our Senate colleagues have passed their own version of China competition legislation. Speaker Pelosi has said she plans to reach a bipartisan agreement to bring these two bills together.
Madam Speaker, what does restoring deductibility of R&D have to do with the China competition bills? The short answer is plenty. In terms of competitiveness, China and America are moving in different directions on tax incentives for R&D. The Chinese have enacted a super deduction for R&D expenses. For manufacturing companies in China, that deduction yields an extra 100 percent of eligible R&D expenses. This deduction is in addition to actual R&D expenses incurred. That's why they call it a super deduction.
Let's discuss an example. A manufacturing company that undertakes
$100 of R&D in China would deduct $200. By contrast, a company that undertakes $100 of R&D in the United States would deduct only $10 in 2022. R&D conducted in China would thus receive 20 times the tax benefit of R&D conducted in the U.S. When all R&D incentives are considered, China would have incentives more than 11 times as generous as those of the United States. Eleven times as generous, Madam Speaker. How are American companies going to win the race with Chinese companies who have that kind of head start?
We should look at including the four-year delay of amortization of R&D in the final America COMPETES legislation. Inclusion becomes more important if it appears lo be moving more quickly than the Build Back Better legislation.
Madam Speaker, there is another legislative vehicle Congress should consider for this urgent matter. Congress is in the process of addressing defense and non-defense appropriations spending because the continuing resolution expires on February 18, 2022. Congressional negotiators should be aware that a reversal of the decades-old R&D tax incentives brings adverse national security consequences.
Where's the linkage to national security? Look no further than the National Science and Technology Council. They concluded that ``ensuring national security and resilience is critical for the United States, especially as other nations dramatically increase their R&D expenditures'' and sustained R&D investments ``are essential to ensure that the United States remains able to secure and protect the American people in the face of this increased competition.'' Ignoring R&D amortization would have implications for our national security interests and should be resolved by the time these issues are settled.
Madam Speaker, strong tax incentives for R&D have long had bipartisan support. The initial R&D credit was passed by a Democratic House. Republican Senate, and signed by President Reagan. Last year a bipartisan group of 96 House members and 26 Senators introduced legislation permanently reversing amortization of R&D expenditures. With amortization of R&D now in effect, the bipartisan goal of restoring this bipartisan tax incentive becomes even more compelling.
Congress must act immediately, certainly before the end of this quarter, to maintain the immediate deductibility of R&D expenditures. As each month passes, failure to act yields proportionately more harm to US innovation and competitiveness. All available legislative vehicles should be considered.
Madam Speaker, America's innovators cannot wait further.
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SOURCE: D'') EXPENSES
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