January 31, 2024
In late January, Rep. Jason Smith (R-MO) and Senator Rob Wyden (D-OR) introduced the Tax Relief for American Families and Workers Act, a bipartisan proposal to promote innovation and restore America’s global competitiveness. The new agreement extends the 2017 Tax Cuts and Jobs Act (TCJA), addressing critical provisions, including restoring full and immediate expensing of research and development (R&D) costs, renewing interest deductions, and allowing full expensing of new machines or equipment. These changes would provide both small and large businesses with various avenues to innovate and manage unforeseen costs, like rising interest rates.
Currently, businesses are required to write off domestic R&D expenses over five years and non-domestic R&D over 15 years, a process called “amortization.” As markets and consumer attitudes can change drastically from year to year, amortization requirements can hinder R&D investment by making it both more costly and risky. The new provision eliminates this requirement, allowing businesses to deduct R&D expenses immediately. The change alone could stimulate $70 billion in new R&D investment.
Next, the new proposal restores more flexible interest deductions to minimize businesses’ tax liability. In 2023, the Federal Reserve raised interest rates to the highest levels in nearly 25 years, disproportionately affecting small businesses that found it more expensive to borrow money to invest. Smaller firms are already at a disadvantage, with interest costing six percent of their revenue compared to two percent for larger businesses. Restoring interest deductions would ease the financial strain on small firms, enabling them to hire new employees and invest in capital improvements. The proposal is estimated to generate 867,000 jobs and an additional $58 billion in take-home pay for American workers.
Lastly, the extension of 100 percent bonus depreciation allows businesses to fully deduct the cost of new business assets immediately, reducing their tax liability. Under current law, businesses can only write off a portion of the cost associated with new capital investment, with the allowable deduction decreasing 20% each year until it reaches zero in 2026. Over half of U.S. businesses have utilized this provision in the past to finance capital improvements and boost productivity through purchases of new equipment.
Collectively, these provisions alleviate the financial burden and risk of R&D and capital improvements, encouraging companies to allocate funds towards meaningful investments rather than routine business expenses.
The Florida congressional delegation should support these new provisions. Over the past five years, R&D spending growth has slowed from an average of 6.6% to just 1% in the last year. In contrast, China offers companies with a 200-percent “super deduction” for new investments. This super deduction has allowed China, a nation widely regarded as a foreign adversary, to become a global leader in artificial intelligence and semiconductor manufacturing. Only a quarter of U.S. companies have adopted AI in some capacity, lagging significantly behind China, where AI adoption rates are 58%.
Without the incentives offered by Rep. Smith and Senator Wyden, America will continue to fall behind foreign adversaries who have already implemented the financial incentives necessary to spur innovation.
These programs have already demonstrated success. Before the TCJA, America faced an investment slump mirroring today’s stagnant investment and innovation climate. The same incentives in the TCJA previously spurred $2 trillion in R&D investment — the highest on record. Similarly, full expensing provisions from the 2017 reform grew U.S. investment in new machinery and equipment by over 20 percent.
At a time when the U.S. needs to bolster global competitiveness, the Tax Relief for American Families and Workers Act offers meaningful ways to promote business growth and maintain competitiveness globally. With so much of Florida’s economic future on the line, it’s important for the Florida Delegation to consider that these critical incentives should become law. It’s simple: they can help put America back where it belongs—at the top of global innovation. Florida’s congressional delegation must recognize this reality and select the path that will grow the economy and allow America to become a leader in innovation.
