U.S. Manufacturers Need R&D Tax Deductibility To Be Globally Competitive
Randy Wolken, President & CEO
On March 17th, a bipartisan Senate bill was introduced into legislation that would allow businesses to once again fully deduct R&D expenses in the year they are made and expand the refundable R&D tax credit. The American Innovation and Jobs Act, sponsored by Senators Maggie Hassan (D-NH) and Todd Young (R-IN), would restore the immediate deductibility of R&D expenses. Manufacturers must have this capability to be successful.
Last year, a tax change went into effect requiring companies to amortize or deduct their R&D investments over a period of years, making R&D more costly. According to a recent analysis by the National Association of Manufacturers (NAM), the sector would lose nearly 60,000 jobs and face an output decline of more than $31 billion this year alone if the change is not reversed. The U.S. has become a global outlier, joining Belgium as the only other developed country requiring the amortization of R&D expenses. Meanwhile, China provides a 200% “super deduction”—20 times the amount allowed in the U.S. tax code—for its manufacturers’ research.
Without this critical legislation, innovation gets a lot more expensive—which should worry us all. Until recently, businesses could deduct 100% of their R&D expenses in the same year they incurred those costs. But a tax law that took effect at the beginning of 2022 requires businesses to spread their deductions out over five years instead, driving up the cost of the innovations that keep our economy strong. For instance, at International Paper, an American supplier of renewable fiber-based recyclable packaging and pulp products, that change is causing severe challenges.
In a recent interview with the National Association of Manufacturers (NAM), International Paper’s Vice President of Finance and Corporate Controller, Holly Goughnour, details how destructive the current law is. “Our company invests in R&D for two main reasons: making better products for our customers and creating safer, more efficient, and sustainable manufacturing processes,” said Goughnour. Goughnour adds, “we spend a lot of time and money working to make a better performing, more sustainable and more durable product, but innovation is about more than the product—it’s also about improving the safety and efficiency, and reducing the environmental impact, of our operations.”
Like so many manufacturers, International Paper devotes a significant portion of its resources to innovation, and as a result, the change in tax law has an outsized impact. “Much of our free cash flow goes to R&D activities,” said Goughnour. “The change in tax law has resulted in a significant amount of additional cash taxes in this first year, reducing the amount of capital available to invest back into our business, including additional R&D.”
Goughnour emphasized the need for a tax system that helps manufacturers in the U.S. to compete with companies abroad. According to Goughnour, the new tax change does the opposite. “The new tax law enables European and Chinese competitors to accelerate their R&D faster than us,” said Goughnour. “We’re in a global marketplace, and the new tax law puts U.S. manufacturers at a competitive disadvantage. Almost nobody else in the world has this policy,” said Goughnour.
R&D is a growth engine for the U.S. economy. We cannot have a tax policy that discourages investment in R&D. The new law reduces innovation, slows needed investment in innovation, and hurts American businesses, employees, and consumers. MACNY applauds the introduction of the American Innovation and Jobs Act, which will help the U.S. out-compete China and return the U.S. to the status of every other developed country. We need this legislation passed and signed into law now more than ever.
Across the country, manufacturers are hiring workers, reinvesting in communities, and creating the products that move us forward. Congress must act upon the American Innovation and Jobs Act quickly, supporting critical research that allows manufacturers to improve lives in America, compete globally, and provide people worldwide with innovative products.