Some of the largest U.S. companies are pressing congressional leaders to restore a more generous tax break for research and development in the delayed spending package for fiscal 2022.
It appeared more likely this week that Congress will address the provision, which is popular on both sides of the aisle, in another package later this year. But lawmakers welcomed the push, and some expressed support for addressing the issue as soon as possible, particularly given a mid-April tax deadline that could cost companies $8 billion.
The omnibus appropriations package would be the quickest avenue with Congress facing a March 11 government funding deadline. In a letter, CEOs of Intel Corp., AT&T Inc., 3M Co. and 33 other big corporations said Tuesday that it “could be the last chance to avert the consequences of failing to act before the end of the first quarter.”
Citing Joint Committee on Taxation data, the companies said their estimated taxes for the first quarter would be $8 billion higher if Congress doesn’t act in time, reducing cash flow and putting jobs and investment at risk. Through Sept. 30, the total tax bill would rise to $29 billion.
Before Jan. 1, companies could deduct what they spent on research and development immediately from their taxable income. As of this year, they must gradually write off the expenses over five years, a change that was part of Republicans’ 2017 tax overhaul.
The provision helped fund other tax cuts in that package, but there’s strong bipartisan support for rolling it back.
Democrats included a temporary solution, delaying the shift from this year to the start of 2026, in their $2.2 trillion climate and social safety net bill. The measure passed the House and is now mired in the Senate because of West Virginia centrist Democrat Joe Manchin III’s opposition to his party’s spending plans.
Through 2025, renewing the full R&D write-off would save companies $125 billion, according to the JCT. The provision would begin to gain revenue for the U.S. Treasury in later years, however, as companies would have already fully deducted their investments. Over the entire 10-year budget window, the net cost drops to $4 billion.
‘Top of the list’
With that bill stalled, companies and lawmakers leading efforts on the issue are floating other avenues, including the omnibus spending package.
Senate Finance Chair Ron Wyden said he wants to switch back to allowing research and development costs to be deducted immediately and that it’s an issue “right at the top of the list” when addressing the country’s global competitiveness. Intel, a top chipmaker leading the coalition behind the letter, is the top employer in Wyden’s home state of Oregon.
“I mean, if you look at that 2017 bill, there were a lot of flaws in it,” Wyden said, referencing the GOP tax law. “This was right at the top in terms of hurting American competitiveness. So we’re looking at everything.”
Among signs of bipartisan backing, a bill from Finance Committee members Maggie Hassan, D-N.H., and Todd Young, R-Ind., would restore immediate expensing of R&D and expand other incentives for investment.
“Strengthening R&D investments here at home is a key priority that New Hampshire businesses have raised with me and will help to strengthen U.S. supply chains,” Hassan said in a statement.
Hassan is considered vulnerable for reelection in November; Inside Elections with Nathan L. Gonzales rates her seat Tilt Democratic.
A co-sponsor of the Hassan-Young bill, Sen. Mark Warner, D-Va., said Tuesday that he supports addressing the issue but wasn’t sure how viable a tax title would be in the spending package.
An effort by Democrats to resurrect talks on some form of a reconciliation package could also stand in the way, making it trickier to drop provisions from that proposal.
President Joe Biden used his State of the Union address Tuesday night to make an appeal for Congress to send him legislation touching on many of the same goals as the House-passed climate and social safety net bill.
House Ways and Means Committee member John B. Larson, who authored a bill to scrap the 2017 law change, has suggested the omnibus package or the House-passed China competitiveness bill as potential options for addressing the R&D deduction. On Tuesday, he instead pointed to its inclusion in the $2.2 trillion reconciliation bill.
“R&D is essential to manufacturing and small businesses in Connecticut and across the country and sustains millions of good paying jobs,” Larson, D-Conn., said in a statement. “We were pleased that a four year delay of amortization was included in Build Back Better and are continuing to work to move it forward.”
The top Republican on the Ways and Means Committee, Kevin Brady of Texas, said on a call with reporters that he hopes the R&D deduction could be included in the omnibus. But he said he hasn’t heard talks about including the issue or any other tax provisions in that package.
China bill, tax extenders
Brady said the R&D deduction should be part of discussions as policymakers work to iron out differences in bills passed by both chambers aimed at competitiveness with China, which includes $52 billion in supplemental appropriations for domestic semiconductor manufacturing. Lawmakers are also expected to put together a bill with other popular tax provisions that expired at the end of 2021, known as an “extenders” package.
“We get to keep working on that for a few more months,” Brady said of R&D expensing.
A former congressional aide familiar with the issue, who spoke on condition of anonymity to discuss private conversations, said that despite strong bipartisan support for addressing the issue, the path is unclear. This person pointed to the difficulty of finding a vehicle to move even popular provisions through both chambers.
“While there will likely be an effort to attach this to an omnibus spending bill, the odds may be slightly better for it as part of the China competitiveness bill, but they are still long there,” the former aide said.
Even if lawmakers don’t pass a switch back to immediate R&D expensing until midyear or later, the change would likely be retroactive to the start of 2022.
Still, companies warned in their letter that the change will soon impact their budgeting and increase the cost of research and development. At a time when U.S. allies are facing threats overseas, the companies played up sustained investment in research and development as essential to the nation’s defense. Signatories included major defense contractors like Raytheon Technologies Corp., General Dynamics Corp. and Northrop Grumman Corp.
“The longer Congress fails to act, the more damage is done to innovation, competitiveness, and workers,” the CEOs wrote.