Senate Tax-Writing Committee Examines Tax Incentives to Spur Domestic Manufacturing

March 16, 2021

The Senate Finance Committee on Tuesday held a hearing on how the U.S. tax code could spur domestic manufacturing.

The overarching discussion was how tax incentives could not only help U.S. manufacturers compete with foreign-based companies but also entice offshore competitors to move their operations onshore.

One issue repeatedly raised during the hearing was the fate of the Research and Development (R&D) Tax Credit.

Current law allows R&D costs to be expensed in the year they occur. However, the 2017 tax reform bill modified this provision beginning in 2022. Next year, R&D costs incurred domestically will be amortized over a five-year period while those costs incurred abroad would be amortized over 15 years.

It was stated at the hearing that allowing these changes to occur to the R&D tax credit would neither help domestic manufacturers nor induce foreign-based producers to relocate to the U.S.

The U.S. would lose 67,700 R&D related jobs in each of the first five years after amortization takes effect and 169,400 annually in each subsequent year, according to Jay Timmons, President and CEO at the National Association of Manufacturers, who testified before the committee.

Another tax issue repeatedly raised during the hearing was the interest deduction. Business interest deductions are currently limited to 30% of its EBITDA (earnings before interest, taxes, depreciation and amortization). Beginning in 2022, this deduction is further limited to 30% of EBIT (earnings before interest and taxes), which removes depreciation and amortization from the base.

This change will weaken the incentive effects of bonus depreciation, according Michelle Hanlon, a professor at the Massachusetts Institute of Technology, who also testified before the committee.

The issue of extending the 20% deduction for pass-thru entities was raised a few times during the hearing and witnesses stressed that it should be extended before it expires in 2026.

Many of the witnesses also raised concern over Congress extending tax incentives to help the manufacturing sector and paying for those extensions by increasing the corporate income tax rate. President Joe Biden proposed on the campaign trail to increase the 21% corporate income tax rate to 28%. Witnesses at today’s hearing cautioned against the maneuver, saying it would essentially undo any financial benefit from extending any tax incentive.

“You would be giving on one hand and taking away with the other,” Hanlon said.

Senate Finance Chairman Ron Wyden (D-Ore.) ended the hearing saying that he will discuss the issues raised by witnesses with lawmakers and fashion legislation that will provide the manufacturing sector with long-term tax rules instead of tax rules that expire within a year.

“I’ve seen too many short-term tax policies… I’m not going to support [tax policies] with a shelf life shorter than a carton of eggs,” he said.

He also said that other hearings on this topic could occur in the future and the primary reason for any upcoming legislation would for the U.S. to best China when it comes to manufacturing.

“We need to out compete China. That’s what this is all about: Out competing China,” Wyden said.

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