Bipartisan heat ramps up over stalled research tax break

Big corporations, facing billions of dollars in higher taxes, seek quick fix from Congress

Rep. John B. Larson, D-Conn., and allies say the U.S. risks falling behind China if the deduction isn't restored. (Tom Williams/CQ Roll Call file photo)
Rep. John B. Larson, D-Conn., and allies say the U.S. risks falling behind China if the deduction isn't restored. (Tom Williams/CQ Roll Call file photo)
Posted May 4, 2022 at 11:45am, Updated at 2:42pm

Dozens of House members sent a letter to party leaders calling for “immediate action” to restore a more generous tax break for companies’ research and development spending, as senators prepared to weigh in with their own show of support Wednesday.

The bipartisan letter led by Reps. John B. Larson, D-Conn., and Ron Estes, R-Kan., and signed by 67 other lawmakers argues that reviving businesses’ ability to fully and immediately deduct research and development costs is a matter of global competitiveness, particularly as the U.S. tries to compete economically with China’s growth, according to a copy of the letter obtained by CQ Roll Call.

“As each month passes, failure to act yields proportionately more harm to innovation and competitiveness,” the lawmakers wrote. “We request immediate action on this urgent tax policy matter.”

Meanwhile, a bipartisan Senate duo teed up a nonbinding "motion to instruct" conferees to restore the R&D break as part of a bill aimed at boosting U.S. industrial competitiveness in part by providing financial aid for domestic semiconductor manufacturing.

A provision of Republicans’ 2017 tax law that took effect at the start of this year requires companies to deduct R&D expenses over five years, rather than allowing the deductions all up front. There’s broad interest in reversing that change, which raised more federal revenue in the short term and offset tax cuts in the 2017 law.

The letter to Speaker Nancy Pelosi and House Minority Leader Kevin McCarthy comes as the House and Senate are beginning negotiations to reconcile differences between competitiveness bills.

The Senate was set to vote Wednesday on 28 motions to instruct, which are nonbinding and mainly serve messaging purposes as a show of support for inclusion of a particular provision or legislation in the final package. 

The votes include a motion from Sens. Maggie Hassan, D-N.H., and Todd Young, R-Ind., instructing Senate negotiators to insist on reinstating full and immediate R&D expensing while also expanding a separate small-business research credit. The pair are lead sponsors of a stand-alone bill on the topic and have led bipartisan calls to attach the issue to any upcoming legislation.

Young, the lead GOP sponsor of the Senate's version of the competition bill, is a member of the House-Senate conference committee.

[Major corporations make last-ditch push for R&D tax break]

Companies and their lobbyists are hoping to add the R&D tax change to the package in conference, making the case that it fits with the thrust of the legislation — and that it’s a time-sensitive issue. The nonpartisan Joint Committee on Taxation estimates that the absence of full and immediate expensing will cost companies $29 billion by the end of the third quarter this year, with about $8 billion already due at tax time last month. 

That financial hit is affecting a broad coalition of big corporations that either produce or rely on semiconductor supplies, including chipmaker Intel Corp., automaker Ford Motor Co. and defense contractors such as Lockheed Martin Corp. 

President Joe Biden on Tuesday visited a Lockheed plant in Troy, Ala., that produces Javelin antitank missiles his administration wants to ship to Ukraine. He talked up the importance of semiconductors to that effort.

Intel reported to shareholders last month that the R&D tax change added 1.1 percentage points to the company's effective tax rate in the first quarter of this year. Meanwhile, Lockheed said that if the change isn't reversed retroactive to Jan. 1, 2022, it would reduce the company's operating cash by $500 million this year.


But the corporations' goal faces hurdles, including that a four-year delay of the tax hit is included in Democrats' $2.2 trillion social safety net and climate package. Separating out the R&D break could signal that package won’t move forward — a message Democrats don’t want to send — and some in the party don’t want to pass it without using it as leverage to get Republicans on board with tax breaks to benefit lower-income Americans.

While the Larson and Estes-led letter doesn’t specify a vehicle for getting legislation on the issue through Congress, it advocates urgency and says R&D investments in China will get 20 times the tax benefit of those made in the U.S. if the law remains unchanged.

Larson and Estes introduced a bill last year to permanently restore full, upfront R&D expensing, which amassed 100 other co-sponsors. In their latest letter, they seek a four-year delay of the change, a temporary salve that would cost less in the decadelong window used to assess legislation’s impact on federal revenue.

Led by two members of the tax-writing Ways and Means Committee in Larson and Estes, those who signed on to the latest House letter include eight other Democrats and 15 Republicans on the panel. Among them are the Republicans running for their party’s top position on Ways and Means next Congress: Reps. Vern Buchanan of Florida, Adrian Smith of Nebraska and Jason Smith of Missouri.

Along with arguing that the less generous R&D tax break could result in job losses and a competitive disadvantage globally, the letter also emphasizes its bipartisan track record.

“Almost seven decades of history show heavy bipartisan tax policy support for R&D,” the members said.