Tax credit sought by defense industry stuck in Senate limbo

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Congress is closer than ever to restoring a tax credit the defense industry has lobbied extensively for since it partially expired in 2022. But final passage is far from assured as the Senate wrangles over other issues in the broader bipartisan package.

The $78 billion tax bill, sponsored by House Ways and Means Chairman Jason Smith, R-Mo., includes a provision to fully restore a research and development credit Congress first enacted in 2017 as part of former President Donald Trump’s sweeping tax cuts. The House passed the bipartisan bill in January in an overwhelming 357-70 vote.

The 2017 R&D tax cuts allowed companies to immediately deduct their research and development expenses. But in 2022, the provision partially expired, meaning companies now must spread that deduction out for a minimum of five years or longer in an amortization period.

Smith’s bill would fully restore the immediate R&D tax deductions without the amortization period while allowing defense contractors and other businesses to retroactively claim the credit for 2022 as well.

Aerospace Industries Association chief executive Eric Fanning said in a statement the “critical bill provides a short-term fix to a harmful policy that has forced American businesses to cut back on R&D spending.”

The defense industry is pushing the Senate to pass it before the 2023 tax filing season ends.

“Congressional members deserve enormous credit for addressing a significant issue negatively impacting companies of all sizes and across all sectors of the U.S. defense-industrial base,” the National Defense Industrial Association said in a statement. The statement said the five-year amortization period “substantially reduced the cash flow many small businesses had available to maintain a highly qualified and specialized workforce and to accelerate their research and development investments.”

The top five biggest defense contractors — all of whom are National Defense Industrial Association members — have also lobbied Congress heavily to restore the tax credit, according to lobbying disclosure forms reviewed by Defense News.

Lockheed Martin, General Dynamics and Northrop Grumman brought up the R&D tax credit every quarter while lobbying Congress last year, according to the disclosure forms. Boeing and RTX, formerly known as Raytheon Technologies, also raised tax issues every quarter.

Lockheed Martin and Northrop Grumman both spent at least $10 million total last year lobbying Congress. General Dynamics spent at least $12 million lobbying in total last year, while RTX spent at least $11 million and Boeing at least $14 million.

All of those companies, except Lockheed Martin, are also members of the Aerospace Industries Association.

Last year, Sen. Elizabeth Warren, D-Mass., and Rep. Chris DeLuzio, D-Pa., pressed defense contractors on their lobbying to restore the R&D tax credit, deriding it as “nothing but corporate handouts.” But the R&D tax credit nonetheless enjoys widespread bipartisan support.

Even so, the bill remains stalled in the Senate over unrelated issues, and the Financial Services Committee has yet to advance it amid opposition from ranking member Sen. Mike Crapo, R-Idaho.

Crapo lambasted efforts from the House “to pressure Senate Republicans to rubber stamp” the compromise legislation “as counterproductive” in a statement last week.

“This was the risk of announcing a deal without my support and with no near-term path forward in the Senate,” said Crapo. He said he disagrees with the bill’s child tax credit policy even as he supports its measures to maintain “pro-growth” policies from the Trump tax cuts.

“That is precisely why I am still working with my Senate colleagues to reach consensus on a path forward,” Crapo added.

In the meantime, Senate Democrats are looking at possibilities to advance the bill outside the Financial Services Committee. Those options range from holding a stand-alone vote on the Senate floor to attaching it to must-pass legislation due this month. Possible legislative vehicles include the long-overdue spending bills or the Federal Aviation Administration Reauthorization Act.