Meuser: “American Ingenuity: Promoting Innovation Through the Tax Code”
Washington, June 6, 2023
WASHINGTON, D.C. – Today, the House Committee on Small Business Subcommittee on Economic Growth, Tax, and Capital Access is holding a hearing titled “American Ingenuity: Promoting Innovation Through the Tax Code.”
Subcommittee Chairman Dan Meuser’s opening statement as prepared for delivery:
Welcome to today’s Subcommittee hearing highlighting the importance of having a tax code that promotes innovation for small businesses.
First, I want to thank our witnesses for joining us today. Your time here is greatly appreciated by all of us on the Committee, and I’m happy to have business leaders from Pennsylvania’s Ninth District here with us today.
Today’s hearing addresses a vital aspect of why our country has been an economic powerhouse and why the issues we are set to discuss are so paramount to the future of our country. America has been the home of countless revolutionary products that changed the face and trajectory of the world.
Innovation requires risk and with it, investment in research and development. As our witnesses will discuss, research and development for small businesses is often more difficult due to issues with capital access and a smaller workforce that requires a longer time horizon to realize any possible return on investment. In many circumstances, these risks make small business owners gamble their entire company on propositions that may never pay off.
To incentivize innovation, the American tax code has provided many incentives for businesses to invest resources into research and development. For small businesses that don’t have endless cash flow and reserves, consistent R&D tax incentives are often their only option. These include two different provisions - R&D expensing and bonus depreciation - which allow small businesses to make significant investments they otherwise wouldn’t be able to make.
In 2017, the Tax Cuts and Jobs Act took the successful bonus depreciation credit to the next level, allowing 100 percent bonus depreciation for qualifying purchases. This law, which was a resounding success for Main Street, changed deductions, depreciation, expensing, tax credits, and other items that significantly benefit small businesses.
Unfortunately, the immediate expensing of R&D expired in 2022 and now small businesses are required to amortize their R&D costs over five years, rather than deducting them immediately. For example, take a small business with $1 million in revenue, $500,000 in R&D costs and $500,000 in other deductible expenses. Under 2021 tax law, it would have zero profit and its owners would owe no income taxes. For 2022, it could deduct only $50,000 in research costs, and its owners would now pay taxes on $450,000 of income.
Analysis by the Tax Foundation, an independent tax policy research organization, found that restoring immediate expensing of R&D will benefit both businesses and workers by increasing economic output and wages, and creating an estimated 19,500 jobs. It would also help build on the broad success of the Tax Cuts and Jobs Act. By cutting taxes across the board, we saw the federal government take in record rates of revenue. Thanks to lower rates, overall corporate tax revenue surged by 43% last year and overall federal revenue jumped 48% relative to before the law was enacted.
Additionally, bonus depreciation is set to decrease 20 percent annually through 2027. Unless Congress acts soon, private sector innovation, especially within the small business economy, will be hamstrung and unable to invest in R&D.
Although the sunsetting of these provisions has been known for several years and even though there is broad bipartisan support for reinstating the expensing option for R&D expenditures, Congressional Democrats continue to hold negotiations hostage by insisting unrelated measures be included in any legislative remedy.
I am glad to have Congressman Ron Estes, a distinguished member of the House Ways and Means Committee, joining us today to discuss his efforts to ensure we continue to incentivize small business investment in R&D. Congressman Estes’s bill, The American Innovation and R&D Competitiveness Act, would permanently restore full and immediate R&D expensing for small businesses. I am a proud cosponsor of this legislation which has immense bipartisan support with 93 cosponsors, equally split among Republicans and Democrats.
Small businesses are able to fill gaps in innovation that larger corporations may miss and are built around fresh perspectives and new approaches to everyday challenges. Over 99.9 percent of businesses in America are small businesses, accounting for 44 percent of all domestic economic activity and two-thirds of all jobs in the country. At a time when Main Street America is dealing with stubbornly high inflation, interest rates that are being raised at the fastest pace since the 1980’s, supply chain disruptions, and a prolonged labor shortage, the disappearance of these provisions act as massive inhibitors against small businesses from achieving their full potential.
These roadblocks against America’s small businesses also jeopardize our standing on the world stage as the premier innovator. For tax year 2022, the Organization for Economic Cooperation and Development ranked the U.S. 30th out of 36th based on the strength of our nation’s R&D tax incentives and far behind China. For decades, this country has out innovated the world at every turn and without a strong innovative base, we risk falling further behind dangerous adversaries on the world stage. Before immediate R&D tax expensing was repealed, China’s R&D tax incentive was already 2.7 times more generous than the U.S. While I have every confidence in the ingenuity of our innovators in America, we can’t continue to force our small business innovators to compete on the world stage with one hand tied behind their back.
Once again, I want to thank everyone for being here on this very important issue and with that, I will yield to our distinguished Ranking Member from Ohio, Mr. Landsman.