Manufacturers’ ability to create jobs in the United States, invest in communities and compete in the global economy is threatened by recent tax policy changes that make it more costly to perform research, buy machinery and finance capital investments.

Specifically, we urge Congress and the Biden administration enact three changes in tax law to support U.S. manufacturing: repeal the R&D amortization provision, return to an EBITDA-based standard for interest deductibility, and restore full expensing.

Let’s start with R&D tax credit, a policy we’ve long advocated for. Manufacturers in the United States drive more innovation than any other sector, performing 55 percent of private-sector research and development in this country. In 2021 alone, manufacturers spent nearly $350 billion on R&D. R&D is the lifeblood of manufacturing: new products, new materials and new processes help propel manufacturing in America forward.

Since 1954, the tax code has recognized the important role of R&D in creating jobs and spurring innovation. Specifically, the tax code has allowed businesses to immediately deduct 100 percent of their R&D expenses in the same year in which they are incurred. However, as of Jan. 1, 2022, businesses have been required to amortize these expenses, making R&D more costly to conduct in the U.S. In fact, the Congressional Budget Office has warned that this requirement will “reduce the incentive to invest in R&D.” In the first full year of the amortization requirement, private sector R&D investment fell during the third quarter, according to the latest GDP report.

According to a recent economic analysis by the National Association of Manufacturers (NAM), the U.S. economy would lose 263,382 jobs and experience a GDP reduction of $82.39 billion in 2023 if the harmful R&D amortization policy is not reversed quickly.

Unless this policy is reversed, the U.S. will be just one of two developed countries with an amortization requirement for R&D expensing (the other being Belgium). Meanwhile, China provides a 200 percent deduction for R&D expenses for manufacturers. That’s not good.

Another policy Congress needs to address involves interest deductibility. Debt financing plays an important role in supporting manufacturing growth. Many manufacturers borrow funds to finance long-term investments in equipment and facilities. At the beginning of 2022, a stricter limitation on the deductibility of interest payments on business loans went into effect, increasing the cost of financing critical investments in machinery and equipment.

The maximum interest deduction under section 163(j) is now limited to 30 percent of a company’s earnings before interest and tax (EBIT). This is a substantial change from the standard in place prior to 2022, which was based on earnings before interest, tax, depreciation and amortization (EBITDA). By excluding depreciation and amortization, the EBIT-based limitation makes it more expensive for capital-intensive companies to finance purchases, grow their businesses and hire new workers.

This stricter limitation effectively acts as a tax on investment, and it makes the U.S. a global outlier. More than 30 countries in the Organization for Economic Cooperation and Development have an earnings-based interest limitation. Of those, the U.S. is the only one that employs an EBIT standard. It is significantly harder for the U.S. to compete when our manufacturers face such a competitive disadvantage.

According to a recent study, failing to reverse this policy could cost the U.S. economy 467,000 jobs and reduce U.S. GDP by $43.8 billion.

Finally, there’s the issue of full expensing for equipment investments. For the past several decades, the tax code has provided businesses with varying degrees of first-year expensing, or bonus deprecation. A 100 percent deduction for the purchase of equipment and machinery in the tax year purchased has been in place since 2017. This critical incentive for capital-intensive industries like manufacturing reduces the after-tax cost of investments that support job creation and retention.

According to recent analysis by the nonpartisan Joint Committee on Taxation, manufacturers led all sectors in the use of expensing by a wide margin. Unfortunately, the 100 percent level of full expensing began to phase out this year and will be eliminated completely by 2027. If this occurs, it will be much more expensive for manufacturers to invest in new equipment.

According to the NAM’s most recent Manufacturers’ Outlook Survey, 89 percent of respondents said higher tax burdens on manufacturing activities would make it more difficult to expand their workforces, invest in new equipment or expand their facilities.

Let’s make it easier for U.S. manufacturers to compete.