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But last year, a tax change drastically shifted how businesses invest in research and development (R&D) to the detriment of our communities, and we need Congress to act now to fix it.
For decades, companies could deduct R&D expenses the same year they were incurred, offering immediate tax relief and financial flexibility for smaller firms. However, this updated tax provision forces companies to now deduct those same R&D expenditures over five years, resulting in a steeper tax burden and discouraging innovation in key sectors like engineering and manufacturing.
While these essential industries typically fuel Pennsylvania’s economy, this tax provision instead disincentivizes engineering and manufacturing companies from engaging in the very R&D needed to uphold our bustling infrastructure and local communities. Immediate expensing allows companies to invest more in research, fostering an environment where innovation can thrive and keeping the U.S. at the forefront of global innovation. Pro-growth policies like this not only help us compete in the global marketplace but also allow us to create jobs and increase wages and benefits for workers.
Plus, most companies relied on immediate R&D deductions to meet overhead costs, including for critical outlays like payroll. But now that small businesses are facing a steeper tax obligation year-after-year thanks to this tax provision, many could face the prospect of mass layoffs or closing their doors for good.
Research reinforces this too. A study from EY found this tax change will reduce R&D spending in the U.S. by $4.1 billion annually, resulting in a loss of 23,400 R&D jobs in each of the first five years of the provision’s enactment. In each year following, the U.S. is projected to lose $10.1 billion in R&D spending and 58,600 jobs.
R&D is the driving force behind innovation. By investing in new technologies and processes, manufacturers and engineers can develop cutting-edge products and solutions. This investment also often translates into the creation of new jobs, injecting new life into local economies that sometimes need a jumpstart, and increased consumer spending and tax contributions do just that.
Unless Congress acts now, the U.S. will remain one of two developed countries that do not permit the immediate deductibility of R&D expenses. I am calling on Congress to learn from our engineers, manufacturers, and other essential industries and communities and acknowledge this tax provision’s massive burden on small businesses engaged in R&D.
But we are running against the clock. Our leaders must take action and pass legislation that prioritizes R&D so that our essential industries and local communities can thrive.
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This piece orginially appeared in The Times-Tribune, The Citizens Voice, The Standard Speaker, and on January 3, 2024. Darlene Roberts is president of the Northeast Pennsylvania Manufacturers and Employers Association.