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March 16, 2021

Senate Finance holds hearing on tax issues for manufacturers

The Senate Finance Committee held a hearing March 16 titled, "Made in America: Effect of the U.S. Tax Code on Domestic Manufacturing," that focused largely on manufacturing incentives and Tax Cuts & Jobs Act (TCJA) changes scheduled to take effect beginning next year: for tax years after December 31, 2021, R&D expenditures are required to be capitalized and amortized ratably over a five-year period; beginning in 2022, the 163(j) business interest deduction limit is calculated without depreciation and amortization (EBIT vs. EBITDA); and 100% expensing is phased down after 2022. Witnesses represented corporations, the National Association of Manufacturers, and United Steelworkers, plus Michelle Hanlon of MIT. Underlying the hearing was the recognition of supply chain challenges exposed by the pandemic, which President Biden has begun to address through executive order, and Republican opposition to proposals by Democrats to increase the statutory corporate tax rate.

In an opening statement, Chairman Ron Wyden (D-OR) said it will be critical look at changes to the 2017 tax law that created a disincentive for R&D. He said improving supply chains and creating jobs is a "premier issue" to bring the parties together. Wyden closed the hearing by saying he would work with Republicans on a package to make US companies more competitive. In his opening statement, Ranking Member Mike Crapo (R-ID) said, "The statutory corporate income tax rate is critical to the United States' competitiveness in the global market," currently at 21%, and "another key aspect to our competitiveness is capital investment."

Bills pertinent to this hearing include:

  • Committee members Maggie Hassan (D-NH), Todd Young (R-IN), Catherine Cortez Masto (D-NV), Rob Portman (R-OH), and Ben Sasse (R-NE) March 15 introduced the American innovation and Jobs Act (S. 749) to restore immediate expensing for R&D investments and expand the refundable research credit for new and small businesses.
  • The American Jobs in Energy Manufacturing Act of 2021 (S. 622) introduced March 9 by Committee members Debbie Stabenow (D-MI), Steve Daines (R-MT) and Senator Joe Manchin (D-WV) would reconstitute the IRC Section 48C 30% credit to invest $8 billion in US manufacturing and industry, which would be available to manufacturers and other industrial users to retool, expand, or build new facilities that make or recycle energy-related products, including in coal communities; and build new or retrofit existing manufacturing and industrial facilities to produce or recycle a wide range of energy products, including advanced electric grid, energy storage, and fuel cell equipment.
  • Committee members John Cornyn (R-TX) and Mark Warner (D-VA) introduced a bill in the last Congress, the Creating Helpful Incentives to Produce Semiconductors for America Act (CHIPS Act, S. 3933), which would create a 40% refundable investment tax credit for qualified semiconductor equipment or any qualified semiconductor manufacturing facility investment expenditures.

Testimony in brief:

  • George S. Davis, Executive Vice President and Chief Financial Officer, Intel Corporation, said the R&D change scheduled under law to amortize R&D costs will significantly increase the cost of doing business in the United States and applauded the bill to undo the change.
  • Jonathan Jennings, Vice President, Global Commodity Purchasing and Supplier Technical Assistance, Ford Motor Company, advocated Electric Vehicle (EV) and manufacturing credits, as well as continuing immediate expensing of R&D.
  • Jay Timmons, President and CEO, National Association of Manufacturers, said the TCJA R&D amortization provision will make it more expensive to perform R&D, causing the US to lose its competitive edge, and expressed concern about more stringent limitations on interest deductions and the phase out of expensing.
  • Michelle Hanlon, Ph.D., Professor, Massachusetts Institute of Technology, said the TCJA corporate rate reduction is widely cited as important to US companies and is very important for the US to remain competitive. Targeted tax incentives are often desirable, including the R&D tax credit and immediate expensing of R&D costs. A minimum tax based on book income is not sensible because financial accounting income and taxable income are computed to serve very different purposes.
  • Donnie Blatt, District Director, United Steelworkers, Columbus, OH, said it is important to discourage outsourcing and profit-shifting to low-tax jurisdictions.

Below is a paraphrasing of select member questions and witness responses.


Wyden: There is a jobs creation toolkit for reshoring and job creation. What is the most important step?

Blatt: Incentives for manufacturers to create jobs in the US rather than moving offshore are the most important step.


Wyden: There is a short-sightedness of US tax policy, including the "bizarre" decision by Republicans to put incentives for R&D on the "chopping block" in moving the TCJA through budget reconciliation.

Davis: R&D and investment tax credit issues are very important for attracting investment.


Wyden: We don't want to rely on China for batteries and need to make sure US has a sufficient supply of batteries.

Jennings: Congress shouldn't disincentivize R&D and should provide cash back for startups' credits.

Corporate rate

Crapo: Congress should not pay for making tax credits permanent and adding additional credits by increasing the corporate tax rate.

Davis: A sustainable, long-term US tax policy is essential.

EVs, 48C

Stabenow: Referencing the Section 30D credit for EVs, why is it so important to expand the tax credit and how does it work with 48C to increase production of component parts?

Jennings: We know Americans are taking advantage of the additional 400,000 units for per-manufacturer EV credit the 2019 legislation proposed, and that is a key item. In conjunction, the manufacturing credit would allow companies to continue innovation and be more competitive globally.

Corporate rate

Chuck Grassley (R-IA): The TCJA provided a 21% corporate rate, which is in the range of rates in Scandinavian countries, for example; a 20% pass-through deduction for qualified business income; and modernized international tax system to make US companies more competitive. We must continue pro-growth policies and the Administration has proposed tax increases including a rate increase to 28%, raising taxes on pass-through businesses, a corporate minimum tax, and doubling the tax rate on foreign subsidiaries. Is spending on infrastructure a fair substitute for low tax rates and a competitive tax system?

Timmons: We have seen enormous job growth as a result of tax reform, which had been long called for. There are great success stories resulting from the TCJA. There are some issues that need to be resolved, including on R&D and interest deductibility.

Hanlon: Raising tax rates now would be a mistake and put the US at a competitive disadvantage.


Maria Cantwell (D-WA): Auto manufacturers are trying to be competitive but we have an issue with batteries in Georgia and with the USMCA 75% threshold, making it tough to meet without producing batteries in the US, and why isn't 4 years (the length of time allowed for a foreign company to supply batteries under a USITC ruling) long enough to get batteries built there.

Jennings: The batteries are the fundamental foundation of EVs and their development and of a facility takes 4 years. A supplier would be needed in conjunction with building a facility. We have not been able to confirm that capacity is available elsewhere in the US, and that would not be compliant with the USMCA.


Cantwell: There have been aviation job losses, though numbers are returning of late. What do we need to do to ensure aviation industry success in the US?

Timmons: We need to promote vaccine acceptance. Tax incentives for workforce training and development are important, as are other programs that will help to upskill and future-proof the workforce, as promoted by the government and private sector.


Cantwell: What do we need to do on the materials side for the shortage we are seeing?

Davis: Work from home has created tremendous pressure on the whole ecosystem and supplies, and it is important for the system to support semiconductors. We are highly dependent on foreign suppliers and supporting the expansion of manufacturing in the US (CHIPs Act) is important.


John Thune (R-SD): Tax reform cut taxes for families and businesses of all sizes. Has the TCJA helped manufacturers compete?

Hanlon: Tax reform was an improvement and provided an incentive to not ship jobs offshore but to build here in the US. We need certainty, for provisions stay in place, such as FDII and the lower tax rate.

Timmons: Some manufacturers have brought production jobs back to the US as a result of the TCJA. Businesses and manufacturers need predictability and stability in the tax code. We have some issues to address to be more competitive, but the TCJA supercharged job creation in the US.


Thune: What tax policies can best position manufacturers to compete in the modern economy?

Timmons: We are here to talk about the R&D amortization and believe there needs to be a broad-based investment tax credit to encourage investments in manufacturing, as well as needing to train skilled workers. US manufacturers have a large amount of open jobs that cannot be filled due to lack of training.


Robert Menendez (D-NJ): We need public-private partnerships at universities to incubate advanced manufacturing processes.

Timmons: Research at universities plus the R&D credit make the US the leading innovator in the world.


Menendez: PPE shortages revealed the vulnerability of our medical supply chain, and I have a bill to provide an incentive credit against GILTI based on manufacturing job creation undertaken in territories. How has loss of pharmaceutical capacity created supply chain vulnerabilities exposed by the pandemic?

Blatt: We are losing a pharmaceutical manufacturer in West Virginia. Workers need to get supplies and the domestic supply chain for pharmaceuticals and PPE is important.

Industrial commons

Rob Portman (R-OH): Are industrial commons of combining various elements of the supply chain, like strong supplier networks and skilled workers, important?

Timmons: This is a very important topic.

R&D, 163(j)

Portman: Amortization of R&D is a big mistake and full expensing needs to stay in the law. The change in the limit on interest deductibility, calculated without depreciation and amortization beginning next year, is problematic because companies are taking on debt due to the pandemic.

Hanlon: The 163(j) limitation will become more binding and more companies will become more limited in their interest deductions.

Timmons: We are a highly capital-intensive industry and need to borrow to invest in future success. Increasing the cost of anything does harm our ability to compete.

Auto emissions

Tom Carper (D-DE): The greatest source of carbon emissions is coming from mobile sources, plus power and industry, but automakers are taking steps to reduce emissions. The legislation on the Section 30C investment tax credit for refueling vehicles will help provide clean refueling facilities, but what else should we be doing?

Jennings: It is critical to have tax incentives to do R&D to eventually be carbon neutral.


James Lankford (R-OK): What can we do to attract suppliers to the US for vehicle production? What are challenges in the tax code?

Jennings: Incentivizing vertical integration, all through the supply chain. We need to retain the competitive tax rate.


Lankford: What effect does the 163(j) change have?

Timmons: The change would discourage investment in manufacturing and make it more expensive to borrow money.


Mark Warner (D-VA): We need a tax credit for companies to improve their workforce, in terms of efficiency, etc.

Timmons: A tax credit in this area could play an important role in training the workforce, including "earn and learn" models, or new deductions for set-up and training.


Todd Young (R-IN): How will R&D amortization beginning next year affect automakers' ability to invest in new technologies?

Jennings: The ability for us to expense R&D immediately is critical for R&D going forward and the change would put us in a noncompetitive position globally.


Hassan: Advocated for her R&D bill.

Timmons: R&D is the lifeblood of manufacturing and the US is behind the world in terms of tax incentives. Belgium is the only other nation to require amortization. He cited an EY study finding that amortization would reduce R&D spending by $4 billion-$10 billion per year.


Daines: Expanding 48C will create jobs in coal and other communities, but we need to examine how the provision will interact with other TCJA provisions like R&D, 163(j), etc.

Hanlon: If we don't extend R&D expensing and bonus depreciation and fix 163(j), it will reduce the benefit of the 48C credit.

The Hassan R&D bill is available here.

The Stabenow 48C bill is available here.

JCT's "Tax Incentives For Domestic Manufacturing" is available here.

Testimony from the hearing is available here.


Contact Information
For additional information concerning this Alert, please contact:
Washington Council Ernst & Young
   • Any member of the group, at (202) 293-7474.