Congress must pass the American Innovation and Jobs Act to keep America’s competitive edge, support A&D workforce
Tax Day is right around the corner, and for many businesses, it’s a time to reflect on the state of their finances and plan for the year ahead. But for the aerospace and defense (A&D) industry, there is a pressing issue that Congress must address immediately: a recent change to the research and development (R&D) tax code that is handcuffing American innovation and jeopardizing our global competitiveness.
Research and development is at the core of the A&D industry. The cutting-edge, highly advanced innovation and technologies made by American A&D companies not only support our national and economic security, but also enable and empower countless facets of modern life – and exist in part because of a U.S. tax code that helped enable significant private investments in R&D.
The U.S. tax code has historically recognized that incentives are the key to innovation and supported private investment in R&D, which has been instrumental to America’s technological superiority for generations. Since the 1950s, businesses have been able to deduct qualifying U.S. R&D expenditures for federal tax purposes in the year they were incurred. But last year, a tax change went into effect that requires a business to amortize R&D expenses over five years, significantly reducing the incentives for private investment in R&D.
For example, U.S. companies investing $100 in R&D are now only able to deduct up to $20 per year over the five-year amortization period, instead of $100 all at once — resulting in a significant loss in cash flow. Less cash means fewer dollars for critical R&D and the highly skilled jobs that support it. Today, 71 percent of U.S. R&D spending originates in the private sector, and nearly 70 percent of that is spending is used for salary and wages. If this tax change stays in place, the country risks losing over 260,000 jobs and $82 billion in Gross Domestic Product (GDP) in 2023 alone. We also risk continuing the decline in real private investment in R&D, which began in the two final consecutive quarters of last year – the first time private investment in R&D has dropped in seven years. With less private investment in R&D, our nation will continue to lag in high-tech skills and expertise necessary to produce vital technologies and remain competitive globally.
Meanwhile, the Chinese government is doubling down on incentives for innovation. In 2020, China set a record for R&D spending, totaling $378 billion. China has extended its super deduction for R&D expenses for manufacturing companies to an extra 100 percent of eligible R&D expenses in addition to actual expenses incurred. That means a manufacturing company that undertakes $100 of R&D in China would deduct $200, or 10 times as much as much as a company would deduct in the U.S. under this new policy, according to the Congressional Research Service.
American companies have always played a leading role in advancing the technology we need to maintain our edge, especially in the defense sector. We must use every tool at our disposal to emphasize and encourage research and development like China does and remain competitive on the global stage.
This Tax Day, Congress has the opportunity to do exactly that. The American Innovation and Jobs Act (S. 866) can reverse the harmful R&D tax change and support American innovation and global competitiveness. Congress should take up and pass the American Innovation and Jobs Act today to send a signal around the globe that the U.S. innovation base is second to none, and we are committed to keeping it that way.