Tax relief within reach in budget-friendly tax bill with pro-growth provisions passed by the U.S. House of Representatives last week.
By Nathanael Scherer
A major new piece of legislation providing critical tax relief to American consumers, families, and businesses passed a major hurdle last week when the House lawmakers overwhelmingly voted to approve the tax package. Dubbed the Tax Relief for American Families and Workers Act (TRAFWA), this important tax package proposes restoring or extending multiple pro-growth tax incentives that promote technological innovation, encourage business investment, and spur job creation.
Among three of the most important features of the TFAFWA are restoring 100 percent bonus depreciation, restoring full expensing for Research and Development (R&D) investments, and ending the COVID-era Employee Retention Tax Credit (ERTC) program, which has been rife with fraud and abuse, and will help pay for the tax package.
The full expensing provision of the bill would restore the ability of businesses to write off 100 percent of new asset costs in the year they were purchased, rather than applying the reduction in taxable income over several years. Until last year, businesses could use this generous tax provision to save money immediately on capital expenditures like equipment and other large assets that lose value over time. This encouraged investment and capital formation and provided businesses with the opportunity to reduce their tax exposure.
Unfortunately, this tax provision was only temporary and is currently phasing out by 20 percent annually, until it fully expires in 2027. The TRAFWA seeks to remedy this problem by retroactively restoring all business investments made in 2023, meaning businesses will still receive the full benefits of 100 percent depreciation for this past year. The bill would also temporarily extend the tax credit through 2026. Such a move would provide businesses with greater flexibility to make investment decisions and plan for their future.
The TRAFWA’s R&D component is equally important. It would restore the ability of businesses to immediately deduct the full cost of their R&D investments. Like 100 percent bonus depreciation, this tax feature incentivizes investment by reducing a business’s tax burden, but it does so for R&D-intensive industries like science and manufacturing, making it critical to product innovation.
Since the beginning of 2022, businesses have been required to spread their R&D investment deductions out over five years, making the tax credit far less advantageous thanks to the ravaging effects of inflation. The result has been a much greater tax burden for businesses. A recent report by the SBE Council found that a failure to renew R&D expensing would cost small businesses $59,000 on average, negatively impacting their ability to share profits and benefits with employees or hire new workers.
More importantly, the new requirement undermines American competitiveness. Few developed nations require the amortization of R&D expenses because such a requirement discourages research investment, which is critical to fostering economic growth and developing new consumer technologies. Therefore, R&D expensing is a critical component of the TRAFWA. The bill would reestablish full deductibility for R&D through the end of 2025 and retroactively apply the provision to the tax years 2022 and 2023.
A third important feature of the TRAFWA would generate important cost savings by terminating the ERTC program. Originally designed to help businesses and nonprofits survive the COVID-19 government lockdowns by providing them with a refundable tax credit, the ERTC program has outlived its usefulness, falling victim to inflated credit claims and subsequent cost overruns. According to the Congressional Budget Office, the program was expected to cost taxpayers just $55 billion over ten years. However, by mid-2023, the program had cost an estimated $230 billion, with the number of claims continuing to increase.
Fortunately, congress is now taking action, including inserting language into the TRAFWA that establishes new ERTC disclosure requirements and tax penalties for businesses that make inflated claims. The bill will also move up the filing deadline for backdated ERTC claims. The Joint Committee on Taxation estimates that curtailing the ERTC would save taxpayers as much as $77 billion over ten years. The University of Pennsylvania’s Wharton School of Business has reached similar conclusions. Therefore, the TRAFWA’s ERTC component has an important role to play in offsetting the cost of other provisions in the tax package.
As a whole, the Tax Foundation estimates the TRAFWA would be roughly revenue-neutral. It would save taxpayers money in the short term, including boosting low-income Americans’ after-tax income by 4.8 percent, while also providing a tax cut to businesses that choose to invest, thereby encouraging economic growth.
While the tax package is admittedly imperfect (it makes neither expensing provision permanent), its many pro-growth features would go a long way toward incentivizing future investment and innovation. This would provide Americans with the economic relief they need without substantially adding to the national debt.