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Oct 05, 2023

Plastics industry leaders lobby Congress for research and development tax breaks

Washington — Tax policy took center stage at a plastics industry lobbying day

Washington — Tax policy took center stage at a plastics industry lobbying day in Washington April 19, with executives fanning out to urge Congress to drop a Trump-era research and development tax change they say is hurting their bottom lines and stifling innovation.

At issue is a provision in President Donald Trump's signature 2017 tax cut plan that changes how companies deduct R&D expenses, turning it from a 100 percent deduction in the year money is spent into an amortized deduction spread over five years.

It's that amortization mandate, which didn't start until 2022, that companies say is just now hitting their tax bills and prompting a lobbying push.

"People are realizing that it's gone into effect and there is a firestorm that is beginning up there [on Capitol Hill]," said Suzanne Morgan, senior director of government affairs at the Plastics Industry Association, at a briefing for companies ahead of its April 19 Congressional visits.

Matt Seaholm, president of the association, told the dozens of executives at the briefing that the R&D deduction is the top issue to emphasize in Congressional meetings on Capitol Hill. Many other industries have also been lobbying Congress on it.

The plastics association was pushing two bills that would repeal the amortization, the "American Innovation and R&D Competitiveness Act," which was introduced April 18 in the House, and a Senate companion, the "American Innovation and Jobs Act," introduced in March.

"Supporting and encouraging R&D investments will create jobs for small businesses, especially in STEM fields which are critical positions to the plastics industry," Seaholm said in a statement.

The new R&D amortization deduction policy was part of President Trump's "Tax Cuts and Jobs Act of 2017," and was put in place to help pay for other tax changes that were beneficial to manufacturers, like a reduction in the tax rate for C corporations from 24 percent to 21 percent, said Michael Devereux, a partner and industrial products manufacturing leader for tax and business consultancy Wipfli LLP.

While those other tax cuts went into effect immediately, the R&D amortization to raise revenue to pay for them was delayed until January 1, 2022.

Devereux, who was at the plastics association's lobbying briefing, said in an interview that he has manufacturing clients with significantly higher taxes because of the R&D amortization.

"I've got $20 million companies, their tax bills are $1 million more than they were," he said. "I've got tool shops that are $10 million in sales and their tax bills are $1.6 million more than it would have been."

"It's flat-out punitive," Devereux said.

He believes Washington should restore full R&D deduction for the year the money is spent, which had been tax law since 1954.

Plastics injection mold making company Westminster Tool Inc. in Plainfield, Conn., said the amortization provision could hurt its growth.

"Under the current tax law, our small family-owned business will have to limit growth and face difficult decisions when it comes to innovating," said Colby Coombs, chief financial officer, in a statement from the plastics association. "Supporting full expensing R&D will give us the ability to compete, create more jobs, improve our products, and develop our manufacturing processes for the medical device industry."

The plastics industry spends about $40 billion a year on R&D, according to an estimate from the plastics association's economist, but a 5-year amortization would increase industry taxes and make it less competitive in global markets.

As well, the current higher interest rates and higher business investment costs support the need for immediate R&D deductions, said Perc Pineda, the association's chief economist.

However, supporters of the amortization policy, like the Institute on Taxation and Economic Policy, say that R&D deductions can be abused and argue that deducting research expenses over time is logical because benefits and profits from that research flow over time.

Companies also can use the R&D provisions to lower their taxes without doing research that provides enough benefit to society to warrant a tax break, the group said in a December statement, pointing to companies like Netflix lobbying for repeal of the 2017 amortization policy.

"Every lawmaker wants to express support for research and innovation, but very few seem to be asking what exactly this tax break has accomplished," said Steve Wamhoff, federal policy director.

Utah thermoformer Kaddas Enterprises Inc. said the tax changes have had a big impact.

Its federal income taxes rose 35 percent this year because the company — which specializes in making heavy gauge thermoformed parts to protect the electrical grid — has 18 percent of its payroll supporting R&D, said CEO Natalie Kaddas.

The engineering-oriented company could no longer deduct its R&D-related wages fully each year, increasing its taxable income. It'll have to rethink how it approaches some of that development work, she said.

"We are developing seven to 12 new products every year," Kaddas said. "That's definitely going to be cut back and we're going to do a lot more due diligence in vetting those projects we're going to go after. It's definitely going to impact our decision making on innovation."

Kaddas, who sits on the board of the U.S. Chamber of Commerce, said in a phone interview that she believes the new R&D amortization disproportionately hurts small businesses like hers because larger companies can better absorb sudden tax changes.

"Those smaller businesses are the ones that are really taking the brunt of this," she said.

Kaddas, who wrote an op-ed in the Salt Lake Tribune on the topic April 18, also chairs the U.S. Chamber's Small Business Council.

Although she said she's been working for the last year urging lawmakers to act and preparing for the tax change, she thinks it caught many small businesses by surprise, and that's why the lobbying pushes are now building in many industries.

"This is anecdotal, but I don't believe that some of the smaller businesses realized the impact to them until their taxes were done this year," she said. "I don't know that our legislators were understanding of the issue until they're starting to hear from the small businesses. It really is ratcheting up as far as the concerns."

Morgan told the executives gathered at the plastics association's Washington lobby day that the two bills they're supporting in Congress have significant bipartisan support, with the House legislation drawing 66 cosponsors split equally between the two parties: "That makes quite a statement."

She suggested repeal of the 2017 amortization requirement could ultimately be paired with plans by Democrats to reinstate a $300 a month child tax credit that was enacted during the coronavirus pandemic but has since expired.

Morgan told the companies to talk about the R&D tax bills as job creation legislation.

"We need to take the discussion from being a corporate welfare provision, and make it into a small business relief jobs bill," she said.

Given legislative interest, Kaddas expects the current five-year amortization requirement to be overturned by Congress, but she's not sure when.

She also expects it could be wrapped into a deal involving the child tax credits.

"I'm hopeful that it gets overturned. I know several colleagues of mine hope that it gets overturned this year," she said. "I don't know that I have that level of confidence but I'm also very optimistic."

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