Continuing Work on Tax Reform in Vermont and Washington

After leading efforts for reform over the last decade or more, AIV was recently successful in convincing the Legislature to enact single sales apportionment for state corporate income tax liability, which can significantly reduce state corporate income taxes for manufacturers and other exporting businesses, as well as an expansion of the sales tax exemption for machinery and equipment.

While these reforms should greatly benefit manufacturers and other employers, we know that there are other tax issues that either need reform in Vermont or that might be raised in new legislation that could drive tax burdens back up.

We would encourage employers to contact us at info@aivt.org so that we can follow up on benefiting from recent reforms, keep you informed about new proposals, and work together to engage on both pushing further beneficial reforms and opposing new costs or disincentives.  We are especially interested in hearing from employers with concerns about specific tax issues impacting them or reforms they would like to see.

But important tax issues are of course not limited to state law.  AIV has joined other manufacturing associations and businesses around the country to urge Congress to take action to extend three tax policies vital to employment and economic growth: immediate R&D expensing, a pro-growth interest deductibility standard, and full expensing.  You can contact us at info@aivt.org for more information, updates, and opportunities to get involved on these issues as well, which are discussed in more detail below:

R&D Expensing

For nearly 70 years, the federal tax code recognized the importance of R&D by allowing businesses to fully deduct their R&D expenses in the same year they were incurred. Unfortunately, starting in 2022, changes in the tax code have required businesses to amortize (or deduct over a period of years) their R&D expenses, making R&D more costly to conduct in the US. This harmful tax change has resulted in significant cash flow impacts on businesses, particularly for start-ups and small businesses.

As a result of this change, the US is now one of two developed countries requiring the amortization of R&D expenses. In fact, 17 countries, including 10 OECD countries, provide for the recovery of more than 100% of eligible R&D expenses.

At a time of increasing global competition for research dollars, Congress needs to restore immediate R&D expensing.

Interest Deductibility   

Debt financing plays an important role in supporting growth. Many businesses need to borrow funds to finance long-term investments in equipment and facilities, which in turn help create jobs and enable them to compete effectively. 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.

Prior to January 1, 2022, businesses’ interest expense deductions were limited to 30% of their earnings before interest, tax, depreciation and amortization (EBITDA). Interest deductions are now limited to 30% of earnings before interest and tax (EBIT). By excluding depreciation and amortization, the stricter EBIT standard acts as a tax on investment by making it more expensive for capital-intensive companies throughout the supply chain to finance job-creating growth.

Under an EBIT standard, capital-intensive companies face higher taxes and increased financing costs. The industries most impacted by the change from EBITDA to EBIT are vital to the US economy, with the same study finding that 81% of interest expense disallowed under the new standard would come from the manufacturing, information, transportation, and mining sectors.

Additionally, limiting business interest deductions harms US competitiveness by making the US an outlier compared to our peers in the OECD. Of the more than 30 OECD countries with an earnings-based interest limitation, the US is the only one that employs an EBIT standard.

Congress needs to restore a pro-growth interest deductibility standard. Enabling businesses to efficiently finance growth at a time of rising interest rates will protect the US economy, and particularly small and medium-sized businesses.

Accelerated Depreciation

Over the past several decades, the tax code has provided businesses with varying degrees of first-year expensing (i.e., accelerated depreciation). A 100% deduction for the purchase of equipment and machinery in the tax year purchased was in place from 2017 through 2022. Congress enacted full expensing to spur investments and ensure that the US is well-positioned to attract capital in a competitive global marketplace. However, full expensing began to phase out at the beginning of 2023 and will be eliminated completely by 2027.

Given that full expensing reduces the after-tax cost of capital equipment purchases, this pro-growth incentive can be vital – especially for smaller businesses with tighter margins.

Congress needs to restore full expensing, as failing to do so will make it costlier for businesses to undertake job-creating investments in the US.