As we begin the new year, an uncertain economic outlook lies ahead of us.
Although economic indicators seem to be improving, families in Pennsylvania and across the country are tired of paying more while their dollar is worth less and they still need help. Congress needs to intervene to bolster our economic resilience and prove to regular folks that they understand things are still too expensive.
While there are no quick fixes for this problem, Pennsylvanians should remain confident that Republicans in Congress will hold to their principles to stop impending tax hikes on families and businesses from going into effect. After all, the federal tax cuts the party passed under the Trump Administration were a precursor to the explosive growth our economy saw in the following years.
A crucial part of this effort will be fixing key tax provisions stemming from the 2017 Tax Cuts and Jobs Act (TCJA): immediate research and development (R&D) expensing, full capital expensing, and a pro-growth interest deductibility rule. These tax deductions, which were temporarily enacted as part of the tax bill, have already started phasing down and will fully expire next year—leaving the United States as the only developed economy in the world without these types of tax deductions.
Originally, businesses that incurred research and development expenses — including supplies, technologies, salaries, equipment, materials, and other costs associated with developing products — could deduct these costs in the year they were incurred, rather than having to amortize them over five years. But arcane legislative rules necessitated that the deduction expire at the end of 2021 in order to pass TCJA. Extending it will be critical to maintaining America’s lead in global innovation and moving Pennsylvania’s economy forward.
75 percent of all private-sector R&D spending in 2021 went into the manufacturing industry and our economy relies on R&D more than many understand. From aerospace to chemicals to medicine manufacturing, Pennsylvania is the sixth-largest manufacturing state in America. Manufacturers in the Keystone State account for 12.67 percent of total output in the state, employing just under ten percent of the total workforce, according to the National Association of Manufacturers. That’s half a million jobs with an average salary of $82,793 that could eventually be lost to other countries if companies are forced to pay more to the IRS because they reinvest in their operations.
We’re already seeing the consequences of losing this tax benefit for investing in certain short-lived assets that can increase productivity and wages. The Bureau of Economic Analysis recently published its revised estimate of U.S. Q3 real private R&D investment growth and it’s even worse than the previous estimate. R&D investment contracted by 2.3 percent at the end of Q3 2023, versus an average annual growth rate of 6.6% in the five years following the passage of the 2017 tax bill.
Small businesses and start-ups that often have no early profits rely on full deductions to more quickly invest in operations and develop a sellable product. This manifests in high-paying jobs that will come to Pennsylvania and stay here. If businesses are not engaging in innovation, they’re no longer hiring skilled workers, and it would be a disservice to working families all across the Commonwealth and beyond if politicians ignore these tax fixes once again, making it harder for companies to invest in growth.
Fortunately, a preliminary deal has been reached between Republicans and Democrats to exchange these pro-growth provisions for an expansion of the Child Tax Credit. However, time is running out to provide meaningful tax relief to families and job creators as tax season begins. In 2017, Republicans raised the Child Tax Credit without a single Democrat vote, so today there should be no reason to oppose this pro-family policy in exchange for passing a pro-growth tax policy.
Today, manufacturers and job creators both in Pennsylvania and across the United States stand at a crossroads. The country cannot afford, and Congress cannot ignore this needed tax fix for another year and let 100,000 jobs disappear over the next decade. We need to go another way and it is up to leaders on both sides of the aisle to ensure that our economic leadership will continue throughout this decade and beyond.
Richard Schulze represented Pennsylvania’s 5th district for nine terms. He was a member of the Ways & Means Committee and is a former Chairman of the Republican Study Committee.