WASHINGTON—A new tax rule set to take effect in 2022 will require companies to amortize over five years the expense of investing in research and development instead of expensing it all at once in the same year they incur the cost. This change, enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA), will reduce U.S. GDP by $45 billion annually and cost more than 48,000 direct jobs after 10 years, according to a new report from the Information Technology and Innovation Foundation (ITIF), the leading think tank for science and technology policy.
“Congress should move quickly to repeal this rule change before it takes effect, or it will dramatically reduce the incentive to invest in R&D in America, which will cost jobs and undermine U.S. competitiveness,” said ITIF President Robert D. Atkinson, who authored the report. “The United States was the first country to introduce an R&D tax credit 1981, and it has proved to be hugely beneficial. But since then, America has fallen behind dozens of competitors that provide far more generous R&D incentives. This rule would accelerate the slide and put America all the way near the back of the pack.”
The report notes that the current R&D tax credit in the United States is just 39 percent of the optimal rate to maximize economic benefits relative to budgetary costs—and if the TCJA’s amortization rule is not repealed, the new effective rate will be just 18 percent of the optimal level.
ITIF’s analysis calculates that the U.S. R&D tax incentive currently ranks 24th out of 34 in a comparison group of OECD and BRIC nations—and it would drop to 32nd out of 34 if the new amortization rule takes effect. Underscoring the competitive disadvantage this represents, ITIF’s report shows that China’s R&D tax benefit for companies conducting R&D will increase from 2.7 to 5.7 times more generous than the U.S. benefit.
Firms can be expected to invest around $7 billion less in R&D annually if the amount of R&D performed in the United States drops proportionally with the subsidy rate. ITIF estimates this would reduce U.S. R&D stock by 0.213 percent, which would reduce productivity growth by 0.05 percent per year. After 10 years, the U.S. economy would be $45.2 billion smaller than it would be otherwise, and it would lose approximately 48,400 direct jobs.
“Unless Congress prevents it from happening, the United States is about to become one of the only countries that does not allow companies to expense current R&D costs,” said Atkinson. “Given the intensity of global competition for advanced industry jobs, and the fact that the U.S. R&D tax credit is already relatively weak versus the competition, Congress should pass legislation this year to allow companies to continue expensing their R&D investments in the first year.”
Read the report.
