Tax Policy – Biden’s Plan to Boost Research and Development Should Include Cancellation of Upcoming R&D Amortization
Last week, former Vice President and presumptive Democratic presidential nominee Joe Biden released a set of economic proposals aimed at increasing investment in research & development (R&D) and “breakthrough” technology in energy. Biden should include canceling the upcoming amortization of R&D expenses in 2022, which would pair well with his plan and remove a headwind to additional R&D investment.
Biden rightly points out that federal R&D spending has declined over the past five decades, from about 2 percent of gross domestic product (GDP) in 1964 to about 0.7 percent in 2019. Some economists argue that greater public investment in basic R&D could help boost productivity and economic growth.
While public investment in R&D is one tool policymakers are considering, private investment in R&D—especially applied R&D investment—is another important driver of American productivity and economic growth. An increase in private sector investment in R&D over the past 50 years has offset some of the decline in federal R&D spending. For example, total spending on R&D as a proportion of GDP has remained roughly flat since 2000, standing at about 2.8 percent of GDP in 2018.
Within the next two years, a scheduled tax change will create another headwind to additional R&D investment. Starting in 2022, firms that invest in R&D must amortize these costs over five years, starting with the midpoint of the taxable year when the expense occurs. And costs must be amortized over 15 years for research conducted outside the United States. This will be the first time since 1954 that firms will have to amortize their R&D costs, rather than immediately deduct those expenses.
Instead of allowing the amortization of R&D expenses to occur, Biden and other policymakers could cancel amortization and allow firms to continue immediately deducting the cost of those investments. This would allow firms to fully recover the cost of investment, ensuring that firms do not face barriers to their R&D plans and that they continue to invest in R&D domestically.
Not only would canceling R&D amortization help ensure R&D is conducted in America, it would also translate into higher economic growth. According to the Tax Foundation General Equilibrium Model, canceling R&D amortization would increase long-run GDP by 0.15 percent and generate about 30,600 additional full-time equivalent jobs.
Canceling R&D amortization will also have an effect on federal revenue, reducing it by about $133 billion on a conventional basis from 2021 to 2030. A larger economy reduces the revenue impact through higher income and payroll tax collections, resulting in a $102 billion revenue decrease on a dynamic basis over the budget window.
While canceling R&D amortization is an important tax policy change to encourage American R&D investment, it is important to consider other reforms to the tax treatment of R&D. As we have argued previously, “companies in a loss position do not get the full benefit of an upfront deduction and must carry forward those deductions into future years when they could get a deduction. This reduces the value of expensing for these firms.” This means that firms in a loss position, such as startups and entrepreneurs conducting R&D, may not realize the full value of cost recovery. Improving the tax treatment of operating losses, and reforming the R&D tax credit, could be combined with canceling R&D amortization to remove tax barriers to R&D investment in the United States.
As concern over American competitiveness and onshoring of innovative activity increases, presidential candidates and policymakers should keep in mind the tax increases scheduled to take effect in the coming years, including the amortization of R&D and phaseout of the broader expensing provisions. Preventing these tax changes will improve America’s long-run economic growth while ensuring that broader efforts to improve American dynamism have an opportunity to succeed.