Research and development (R&D) and innovation has long defined our nation. It has allowed us to reach the highest of highs whether it be through unprecedented economic growth, the creation of millions of good jobs, or the development of technologies that have helped to make us safer and stay a step ahead of competing nations.
At the forefront of these efforts has long been the private sector; and it was these same businesses, many of whom are small and medium businesses, that were set to carry us forward in the years to come as they continue to develop the necessary innovations our country needs to grow.
But recent policy changes that eliminated the ability to deduct 100 percent of R&D expenses in the year in which they were incurred (full expensing) and instead required their slow deduction over either five or 15 years depending on if it was a domestic or offshore expense (amortization) have punished businesses for investing in R&D and already started to slow the sector’s growth. By 2032, without change, the sector and our country’s ability to lead on innovation will be forever harmed.
The ramifications will not only hurt our state economy, but our national economy as well. It is estimated that by 2032, the national economy will have shrunk by $45 billion, 400,000 jobs will be lost, and billions in anticipated R&D investments will disappear. And as New York continues to grow in the R&D space, including through the recruitment of major businesses that manufacture computer chips and other technologies to call our state home, it’s clear that we’ll acutely feel the effects of a shrinking sector.
Beyond our borders, however, this change puts us on a dangerous path toward giving away the keys to global R&D supremacy. We’re moving in reverse at a time that countries we have a fraught relationship with, like China, have their foot on the R&D gas.
China has already launched a super deduction for their own private sector R&D expenses and are allowing businesses in certain industries to claim as high as a 200 percent deduction for any R&D costs that they’ve incurred. This comes after a decade-plus of growing their R&D investments at almost double the rate of ours, resulting in the dangerous position of their share of global R&D trailing only ours.
In a similar vein, from a national security perspective, we cannot afford to limit our R&D at a time when foreign adversaries are investing heavily in their own defense and other technologies. China, among others, is looking to position themselves as a leader in artificial intelligence, biotechnology, and defense technology. A move that poses great risks to our national security.
Amortization will, over the next decade, reduce overall private sector R&D spending by $70 billion, a significant number when put in the perspective of both competition and national security. $70 billion could be the difference between new technology that keeps us safe or a world in which adversaries have all the tools at their disposal and we don’t have the capacity to fight back.
We have key businesses in New York like IBM and locations of many significant aerospace and defense companies like Northrop Grumman and Lockheed Martin Systems. Companies that are all innovating new technologies that keep us safe, whether it be software or defense systems. And most importantly ones that we need to be prioritizing and giving the tools to innovate, not stifling, and holding back.
This change in tax code to disincentivize private sector R&D was never meant to take effect and should have never taken effect. The bipartisan support of over a hundred members in the House and 30 in the Senate on legislation to restore full expensing recognize this and the urgency in which it must be dealt with. A throwaway pay-for in a multi-trillion bill from 2017 could have drastic consequences in the years to come without a fix.
It is my hope that Congress can move quickly to help get us there. Restoration of full expensing is the most common sense, and immensely necessary piece of economic, as well as national security, policy that can be passed. If this means that Congress needs to take this issue up as a stand-alone piece of legislation, so be it. Decouple this from omnibus legislation containing other controversial issues and get it done. The stakes are far too high for this to be ignored.
Senator Dean Murray represents the third district in the New York State Senate.
