Small businesses still need the 2017 tax cuts — don’t take them away, Congress

With Congress scrambling to make progress on a number of legislative issues, there will inevitably be trade-offs over what exactly can be passed by slim Republican majorities. One topic that should be recognized as “must-pass” is the 2017 Tax Cuts and Jobs Act.

Many of act’s provisions are set to expire at the end of the year or shortly thereafter, meaning that the tax burden on American families and businesses — particularly small businesses — is poised to grow. Two provisions that are particularly important to small businesses are the expensing of research and development research and development and the corporate tax rate.

The 2017 tax law initially allowed companies to fully expense research and development, deducting the costs from their taxable income in the year that those costs occurred. Lawmakers structured immediate research and development expensing in 2017 to phase out incrementally until it is eliminated, requiring companies to amortize their research and development costs over five years.

The idea may have seemed fine in practice, but the effect of the phase-out was to raise the cost of investment, providing less incentive to spend on research and development and an overall reduction in economic output.

Restoring the ability for American businesses to immediately expense their research and development costs would be a relatively small but important change with positive economic effects. Analysis from the Tax Foundation shows that “[b]y allowing a full and immediate deduction for research and development expenses, firms would engage in greater investment that leads to long-run economic growth.”

A more contested measure in the Tax Cuts and Jobs Act has been about how to deal with the corporate tax rate. The law as it stands features a federal rate of 21 percent, down from a level of 35 percent.

Progressive politicians and leaders have called for a corporate rate hike, mostly characterizing lower rates as a “giveaway” or “handout.” Interestingly, some Republicans have appeared either open to an increase or keeping the rate as is. Vice President JD Vance himself has been in this camp, saying just last year: “I don’t think we need to be cutting the corporate tax rate further.”

As Congress works to identify and preserve key provisions of the Tax Cuts and Jobs Act, lawmakers should oppose calls to increase the corporate income tax rate of 21 percent as a means to offset the impact that losing any of these tax incentives could have. Doing so would be detrimental not just for large corporations but for businesses of all shapes and sizes.

Most people think that traditional C-corporations are strictly big businesses. However, that is becoming less true. An increasing number of small businesses have chosen to structure themselves as C-corps after passage of the Tax Cuts and Jobs Act significantly lowered the corporate tax rate. The reality now is that most C-corps are small businesses and, according to the U.S. Chamber of Commerce, more than 84 percent have fewer than 20 employees.

Increasing the corporate tax rate now would deal a blow to U.S. businesses large and small, many of which continue to deal with still-high inflation, workforce challenges and supply chain problems.

A lower corporate rate is another tool to encourage domestic investment, increase competitiveness and support job growth. Again, the Tax Foundation explains it well: “As additional investment grows the capital stock, the demand for labor to work with the new capital will increase, leading to higher productivity, output, employment, and wages over time.”

Additionally, lower corporate rates discourage “profit shifting,” when companies move their profits from jurisdictions with high taxes to those with lower ones to reduce their tax burden.

Whatever else happens economically, Congress should work together to ensure that there is a proper focus on policies that spur economic growth and job creation. Allowing key provisions in the Tax Cuts and Jobs Act to expire would undermine this key economic goal, hitting small businesses and others that are the backbone of the U.S. economy.

The clock is ticking.

Mario H. Lopez is the president of the Hispanic Leadership Fund, a public policy advocacy organization that promotes liberty, opportunity and prosperity for all.