In the face of intense global economic competition, manufacturing has been a bright spot in the U.S. economy. The industry is growing, and the manufacturing workforce is now nearly 13 million strong—the largest it has been since 2008.
Congress can and should provide a catalyst for more of this growth, but recently, the tax code has taken three big steps backward. In the past two years, important tax provisions that once provided strong incentives for job creation, research and development and investments in new equipment and facilities have expired. If Congress does not reverse course, these changes will lead to significantly higher tax burdens—particularly for small and medium-sized manufacturers. That means fewer jobs and less opportunities for manufacturing workers and their families.
As of January 2022, manufacturers can no longer deduct expenses for R&D in the same year they occur. This makes a big difference for manufacturers in particular and will slow the development of new products, life changing technologies and lifesaving medicines. Manufacturers in the United States drive more innovation than any other sector, performing 55 percent of private-sector R&D in the U.S. With businesses now required to spread the cost of these expenses over five years, R&D investments are significantly more costly, particularly for SMMs.
This will weaken manufacturers across the U.S. and could cost us our technological edge. And if this change to R&D tax policy isn’t reversed, our research shows that the U.S. economy would lose more than 263,000 jobs and experience a GDP reduction of $82.39 billion this year alone. The U.S. is one of just two developed nations that taxes R&D this way, and given that China actually provides a 200 percent super-deduction for R&D investments, it simply makes no sense to impose this limitation on manufacturers here at home.
A stricter limitation on tax deductions for interest payments on business loans also went into effect at the beginning of last year. This change ultimately increases the cost of financing all the critical investments manufacturers make as their businesses grow. The interest deduction now excludes companies’ expenses for long-lived depreciable assets—the exact investments necessary for manufacturing production and growth. Our research with EY shows that leaving this new standard in place could cost more than 460,000 jobs. The U.S. is the only developed country that uses this standard, meaning that this is yet another self-imposed limitation for manufacturers in the U.S.
Finally, a critical incentive for manufacturers to invest in equipment and machinery began to phase out this year. Since 2017, manufacturers could deduct the full cost of capital investments, such as the latest machinery or new equipment which makes work safer and easier. These investments are essential to increasing production, and full expensing reduces the after-tax cost of these investments, supporting growth and job creation. As of this year, the 100 percent level of expensing began to phase out, and by 2027, the ability to deduct any amount will be eliminated completely. Scaling back and erasing this deduction makes it harder for manufacturers to expand their shop floors—it’s the wrong policy at the wrong time.
These tax changes have real consequences for our industry, especially SMMs. In a field hearing of the House Committee on Ways and Means this month, for example, the head of a small manufacturing company warned about how some of these policy changes are hurting her company. Lisa Winton, the CEO and co-owner of Winton Machine Company, testified that the changes to interest deductibility mean her company may have to put off job-creating investments, while the loss of immediate expensing for machinery may force her customers—other manufacturers that buy equipment Winton makes—to use older equipment for longer periods of time, for example. Regarding the loss of the immediate deductibility of R&D expenses, Brewer Science, a small semiconductor producer, notes that companies like theirs are paying higher taxes because of their investments in R&D, and as a result, they are reassessing future investments. That is troubling especially given the intense need to strengthen semiconductor supply chains.
Congress should work to secure every dollar of investment it can for the U.S. economy. These harmful tax policies will make it harder for our domestic industry to keep up with our global economic rivals and should never have been allowed to take effect. Restoring the fair tax treatment for R&D, interest deductibility and full expensing is a commonsense approach to strengthening manufacturing in the U.S., creating manufacturing jobs here and sustaining our competitive edge.
Fortunately, there is bipartisan support for solving these problems. Lawmakers in both chambers have introduced legislation that would restore immediate R&D expensing: the American Innovation and Jobs Act, introduced in the Senate by Sens. Maggie Hassan (D-N.H.) and Todd Young (R-Ind.), and the American Innovation and R&D Competitiveness Act, introduced in the House by Reps. Ron Estes (R-Kan.) and John Larson (D-Conn.). There is also legislation that would restore a more flexible standard for interest deductibility: the American Investment in Manufacturing (AIM) Act, introduced by Reps. Adrian Smith (R-Neb.) and Joe Morelle (D-N.Y.) and Sens. Shelley Moore Capito (R-W.Va.) and Kyrsten Sinema (I-Ariz.). Finally, the Accelerate Long-Term Investment Growth Now (ALIGN) Act, introduced by Rep. Jodey Arrington (R-Texas) and Sen. James Lankford (R-Okla.), would restore full expensing for capital investments permanently.
Manufacturers are facing higher tax burdens already and being forced to scale back because of the phaseout of these provisions. It is up to Congress and the administration to act as quickly as possible to eliminate these unnecessary barriers to even greater manufacturing growth in the U.S.
Aric Newhouse is the senior vice president of policy and government relations at the National Association of Manufacturers.