The House Ways and Means Committee recently passed the Build It in America Act (H.R.3938), which includes several tax provisions to boost energy innovation, affordability, and economic growth in the United States.
Perhaps the most impactful part of the bill is the restoration of full expensing in the tax code through 2025. Originally passed in the 2017 Tax Cuts and Jobs Act (TCJA), full expensing, also called immediate expensing, allows a business to deduct the cost of certain equipment and mechanical upgrades in the year in which they occurred, rather than over time through a lengthy and cumbersome depreciation period. In 2023, these provisions expired, curbing investments in more efficient, cleaner technologies and equipment. The expiration of immediate expensing especially harms small and medium-sized businesses like family farms and machine shops that may not have the capacity to invest in new equipment. Due to inflation, lengthy depreciation schedules are effectively a tax on these purchases as a deduction five years from now is worth less than a deduction today.
Additionally, the Build It in America Act restores full expensing for research and development (R&D) costs through 2025. Also passed in the TCJA, this provision allowed companies to immediately deduct their R&D expenses in the year that they occurred. In 2022 this provision expired, forcing companies to deduct these expenses over a five and 15-year period for domestic and foreign R&D expenses, respectively. As Ways and Means Committee Chairman Jason Smith (R-MO), the bill’s author, points out, the expiration of immediate expensing for R&D disproportionately hurts small and medium businesses and hinders America’s ability to remain a global innovation leader.
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Extending both immediate expensing and reducing barriers for private sector R&D is a win for the environment and economy. As Phillip Rossetti of the R Street Institute has found, immediate expensing has been beneficial for energy innovation and the environment. In 2018, the year after these provisions were passed in the TCJA, environmental R&D jumped by 11.8%, or $3.3 billion. Similarly, the R&D Coalition estimates that in 2020 private sector R&D expenditures totaled $532 billion, or 2.6% of the U.S. GDP.
While beneficial, lawmakers must avoid past mistakes under the TCJA and make these provisions a permanent fixture in the tax code. Failing to do so will provide uncertainty to taxpayers and businesses and lead to fewer investments in clean technologies. Lawmakers must also avoid making these tax credits retroactive. As Alex Brill and Kyle Pomerleau of the American Enterprise Institute write:
The current bill would allow businesses to benefit from 100 percent bonus depreciation starting January 2023, and the expensing of R&D and a lighter interest deduction limitation starting in January 2022. Providing a tax cut for past economic activity simply increases the cost of these provisions without encouraging new investment.
To offset the reduced federal revenue from the bill’s tax provisions, the Build It in America Act repeals several tax credits that were introduced in the Inflation Reduction Act (IRA), including the 48(E) and 45(Y) technology-neutral new clean energy investment production tax credits. These will become available in 2025 when the current wind and solar investment tax credit (ITC) and production tax credit (PTC) are phased out.
While leveling the playing field and getting rid of all tax credits would benefit taxpayers and innovation, the realities of federal lawmaking prevent this from happening. The bill’s plan to phase out future technology-neutral provisions may lead to the continuation of harmful technology-specific ITCs and PTCs. With no future alternative in place, special interest groups would lobby politicians to maintain the status quo. A more durable strategy should phase out targeted tax credits for all mature energy technologies and maintain competitive tax rates more broadly.
Still, the introduction of the Build It in America Act is encouraging as it signals that Congress is ready to implement pro-growth tax policies to drive energy innovation and economic prosperity. For instance, earlier this year, Senator Todd Young (R-IN) and Maggie Hassan (D-NH) introduced the American Innovation and Jobs Act. In addition to making immediate expensing permanent, the bill would also expand the pool of small businesses that are eligible for the refundable R&D tax credit.
The provisions of the Build It in America Act will spur economic competitiveness and bolster energy security and affordability. As Congress looks to lower costs for Americans and drive energy innovation, it would be wise to embrace pro-growth tax policies like immediate expensing and expanding opportunities for privately-funded research and development.