Manufacturers Need a Competitive Tax System
Randy Wolken, President & CEO
A strong and competitive manufacturing sector requires a tax system that enhances growth. In the short term, it’s critical that Congress make the pro-growth tax provisions from President Trump’s 2017 Tax Cuts and Jobs Act (TCJA) permanent.
On April 10, Congress passed a budget resolution that allowed it to move forward with a tax and budget bill. We could begin seeing details of this tax legislation as early as May if Congress sticks to an aggressive timeline when they return from recess on April 28. The legislation is likely to include extensions of the TCJA of 2017, adjustments to the tax treatment of research & development (R&D) expenses, capital investments, and business interest, as well as increased spending on defense and border security. The passage of an extension to the TCJA would have an incredibly positive effect on small to medium-sized businesses by allowing manufacturers to increase hiring, expand operations, and invest in their communities.
Key provisions of the 2017 Trump tax reforms have already expired, with even more set to lapse later this year. Without action, manufacturers will miss tax incentives for R&D and equipment purchases. Small businesses and family-owned manufacturers will see their tax rate double to as high as 43%. As global competition intensifies, we can’t afford to lose these key tax reform provisions.
According to a recent National Association of Manufacturers (NAM) study, if Congress fails to preserve this tax reform by the end of this year, nearly 6 million U.S. jobs—more than 1 million of them in manufacturing—will be lost, and America will lose some $1.1 trillion in Gross Domestic Product (GDP) and over $540 billion in wages.
MACNY has heard from our members. They need a tax code that allows their businesses to be competitive in a global economy. Congress needs to act quickly to ensure the new tax code supports innovation. The private sector accounts for more than 75% of total R&D spending, with small businesses alone accounting for over $90 billion of private-sector R&D investments. With wages and salaries comprising approximately 75% of R&D spending, the R&D amortization requirement is, first and foremost, a jobs issue. For every $1 billion in R&D spending, 17,000 jobs are supported.
Our members need a federal tax code that enables their businesses to invest in growth. Before January 1, 2022, businesses’ interest expense deductions were limited by section 163(j) to 30% of their earnings before interest, tax, depreciation, and amortization. Interest deductions are now limited to 30% of earnings before interest and taxation (EBIT). By excluding depreciation and amortization, this stricter EBIT standard acts as a tax on investment, making it more expensive for capital-intensive companies across the supply chain to finance job-creating growth. This in turn makes it harder for American businesses to compete with companies based in other countries that have greater tax incentives for financing their growth.
Our members also need key incentives for capital equipment purchases. From 2017 through 2022, a 100% deduction was in place for equipment and machinery in the tax year it was purchased. Congress enacted full expensing to spur investments and ensure the U.S. was well-positioned to attract capital in a competitive global marketplace. However, full expensing began to phase out at the beginning of 2023 and is set to be eliminated by 2027. We can’t allow this to occur, as doing so would severely limit capital investments for U.S. companies.
At the state level, small and medium manufacturers need a tax code that assists them in growing in New York. Tax parity with C-corp manufacturers would ensure that the largest percentage of manufacturers are encouraged to invest in their employees and facilities during the planned growth we’ve already seen and the reshoring that’s starting to take shape. Positioning New York State as the place for advanced manufacturing and high-tech expansion is key to the state’s economic future.
We need federal and state representatives to support these critical changes. Please help support our advocacy efforts by joining the sign-on letter campaigns to support TCJA and Tax Parity. To learn more about these necessary changes, please contact me or our Director of Government Relations, Tiffany Latino-Gerlock, at [email protected]. Together, we can improve our federal and state tax codes to promote the necessary growth in our manufacturing sector.