Viewpoint: America’s R&D edge slipping; refuel innovation
One of the great strengths of our nation has been its longstanding legacy of pioneering achievements, fueled by a dedicated focus on research and development (R&D). For decades, America has reigned supreme in R&D, with its private sector pouring $500 billion annually into scientific advancements. This engine fuels our economic leadership, birthing breakthrough technologies and leaving rivals in the dust. However, recent changes in the U.S. tax code, despite widespread opposition, have jeopardized this position.
Much of America’s success, economic growth and the corresponding improvement in the lives of its people has been created through investment in research and development. During the space race, we poured over 4% of our gross domestic product into research and development. We still reap the rewards of those investments that catalyzed many of the technologies we rely on today. Today our public investment is less than 1%. And as that public investment waned in the later part of the last century the private sector stepped in to fill the gap.
For nearly seven decades, from 1954 until the conclusion of 2021, the U.S. tax code incentivized businesses to not just invest in R&D but to invest substantially. It allowed them to fully deduct the expenses incurred from these investments—100 percent of these costs could be deducted in the year they were incurred.
However, the 2017 Tax Cuts and Jobs Act shifted gears, mandating five-year amortization schedules. This sudden slowdown slammed the brakes on innovation, particularly for small and medium-sized businesses – crucial players contributing 15% of total R&D spending. Montana is a state of small businesses - many of which are emerging technology companies in the R&D centers developing around our higher education system. Faced with skyrocketing tax bills, their agility and risk-taking abilities are now in jeopardy.
R&D fuels prosperity. Around 70 percent of private sector R&D spending goes into employee salaries. The projected $70 billion reduction in R&D spending over a decade is estimated to eliminate 400,000 jobs, with the potential for reduced salaries for many others. These jobs and salaries are vital for facilitating upward mobility into the middle class and expanding our GDP. Every $1 billion in R&D creates 17,000 jobs with $1.4 billion in cumulative salaries. Full expensing wouldn't just protect existing jobs, it would ignite 1.2 million new ones over a decade.
Aside from the impact on our economy at home, America is losing its place as the world’s technology leader. Despite historically leading global R&D efforts, our advantage has diminished in recent decades. While we have reduced our focus on R&D, China significantly increased its investment. China's 200% super deduction policy offers six times the benefit of our current tax structure. Fueled by robust incentives, they’re accelerating, and determined to take the technological lead over the US.
As Congress works through updates to the tax code, Montana’s U.S. Senators, Jon Tester and Steve Daines have been steadfast in their support for restoring full R&D investment expensing. They deserve our thanks. Now Congress must act and send a clear message that we will not risk losing our nation’s technology leadership.
John Brueggeman writes from Whitefish and is a former Montana State Senator and State Representative and currently is Chief Strategy Officer for Vitu, a technology company.