In early November, more than 2,000 engineering firm leaders gathered in Tucson for the Arizona Roads and Streets Conference to discuss the importance of improving American infrastructure. One issue stood out: the urgent need to save American innovation from the unintended consequences of our current tax code.
Main Street businesses — including engineering firms here in Arizona — are sounding the alarm about a tax change drastically hindering American innovation. We call on Congress to fix the research and development (R&D) tax so we can continue our work to improve communities.
For decades, U.S. tax code incentivized innovation by allowing firms to deduct R&D expenses in the same year they happened. This approach reduced risk associated with cutting-edge R&D, and empowered America’s engineering industry to fuel innovations that make our roads safer, air and water cleaner, buildings more energy-efficient and infrastructure more resilient.
Recently, Congress changed how R&D investments are taxed — dealing a blow to engineering firms and innovation businesses. Companies can no longer deduct R&D expenses the year they occur and, instead, must spread those expenses over five years. It may seem like a small change, but the new requirement is hitting these employers in Arizona and nationally with crippling tax increases. We moved from a policy of incentivizing innovation to one that punishes the innovators.
The timing couldn’t be worse. The engineering industry needs to create jobs and expand its workforce; an estimated 82,000 more engineers are needed just to carry out work funded through the Bipartisan Infrastructure Law. Instead of investing in good jobs, engineering firms are in many cases taking out loans to write checks to the IRS because of this misguided policy. Companies of all sizes are being hurt, but smaller firms are hit hardest.
For these firms, margins are often slimmer and financial flexibility is limited. The cost of compliance could force them to close their doors.
As CEO of the American Council of Engineering Companies (ACEC), I’m proud to represent engineering firms helping drive the American economy. The industry employs 600,000 professionals nationally, including more than 5,500 workers across Arizona. They are all under threat if Congress doesn’t act quickly to fix the R&D tax issue before the end of 2023.
Fortunately, Arizona’s leaders in Washington recognize the need. Senators Sinema and Kelly, and multiple members of the congressional delegation, support bipartisan legislation that restores the thoughtful approach of incentivizing innovation.
Time is running out. We urge Senators Sinema and Kelly — and Arizona’s entire delegation — to demand action on a solution before Congress adjourns. The impact of this policy is hurting a broad swath of Arizona’s economy, killing jobs and stifling innovation.
It needs to be fixed now.
This piece originally appeared on November 7, 2023, in the Arizona Daily Star. Linda Bauer Darr is President and CEO of the American Council of Engineering Companies.