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A new tax season is nearly upon us, and after a year of record inflation and astronomical energy costs, American consumers and businesses in the energy sector need a break. Congress can provide that relief by addressing issues within the tax code which — if left untouched — will soon harm American energy security and stall innovation.
The year 2023 is shaping up to be a challenging economic year. After record inflation hit families hard in 2022, market analysts are predicting that America will experience a slowdown in economic growth. Meanwhile, consumers and businesses alike can expect energy prices to surge in the near term as demand increases in the winter months and refinery capacity stays at current levels.
To bolster domestic energy security and protect consumers from future price shocks, lawmakers should enact pro-growth tax policies to spur energy innovation. They should start by expanding the research and development (R&D) tax credit for businesses and organizations. First established in 1981, the R&D tax has been a catalyst for private sector research and development. A 2017 paper in the journal The Review of Economics and Statistics found that, in the long term, $1 of R&D tax credit leads to $4 in private R&D spending, which suggests that the tax credit is effectively increasing corporate investments in research and development.
The 2017 Tax Cuts and Jobs Act (TCJA) expanded the research and development tax credit to allow businesses to deduct 100 percent of their R&D expenses in the year that they occurred through 2022. Starting this year, companies will be required to amortize domestic and foreign R&D expenses over a five and 15-year period, respectively. Experts project that this will have a drastic, negative impact on private sector R&D spending, with the R&D Coalition estimating that this will reduce corporate R&D investments by $4.1 billion through 2026 and another $10.1 billion after that.
Similar to the R&D tax credit, immediate expensing has encouraged private sector spending in energy research and development. Implemented under the TCJA, immediate expensing allows businesses to deduct the full cost of certain investments, including new technologies and equipment in the year that they were acquired, instead of over a multiyear depreciation schedule.
Following the introduction of immediate expensing, private sector R&D increased significantly. According to research from the think tank R Street, energy and environmental R&D jumped by 11.8 percent — that’s $3.3 billion — the year after the TCJA was signed into law. For context, energy and environmental R&D expenses increased by only 2 percent from 2012 to 2017. This has boosted American economic competitiveness and helped the private sector deliver next-generation technologies to the market.
Starting in 2023, immediate expensing provisions will begin to decrease, covering only 80 percent the cost of new assets before being phased out completely in 2027. And while the extension of both the R&D tax credit and immediate expensing were included in initial drafts of last year’s omnibus federal funding bill, they did not make the final passage. Congress should look for ways to extend these provisions or make them permanent fixtures in the tax code.
Just as pro-growth tax policies have driven innovation, a pro-growth regulatory system accelerates investments in new technologies and projects. In the United States, the biggest regulatory hindrance to bringing new energy and transmission projects online is arguably the National Environmental Policy Act (NEPA). Enacted in 1970, and largely unchanged since then, NEPA requires any project receiving federal funds to conduct either an environmental assessment or more burdensome environmental impact statement before receiving a permit to begin construction.
NEPA has become a bureaucratic boondoggle that has hindered American energy and economic progress. Under NEPA it takes an average of 4.5 years for energy and transmission projects to receive a permit. NEPA’s outdated process hurts American economic and energy security as well as environmental progress. While the law hamstrings fossil fuel projects, it disproportionately slows down clean energy generation and transmission capacity from being built. At a time when America’s energy grid is becoming increasingly strained and unreliable, the U.S. will need updated transmission capacity to power a clean and reliable future. Modernizing NEPA is crucial to unleashing private and public capital to bring new, innovative energy projects online.
With a recession looming and high energy costs impacting consumers this winter, 2023 is poised to be a challenging year for American families and businesses. Congress can address these issues and protect Americans from future energy price shocks by implementing common-sense policies to accelerate energy innovation and bolster American economic competitiveness.
Jeff Luse is a policy assistant at the Conservative Coalition for Climate Solutions (C3 Solutions).
Research and development