Three Principles Underpinning H.R. 1’s Pro-Growth Tax Policy
By Connor Rabb, Senior Director, Tax Policy
National Association of Manufacturers
The One Big Beautiful Bill Act is a once-in-a-generation pro-manufacturing bill that is already working to boost manufacturing in the United States. If there’s anything the 2017 Tax Cuts and Jobs Act proved, it’s that manufacturers kept their promises to invest, hire, and grow, thanks to the savings from tax reform. It proved what was at risk if the pro-growth tax policies were to expire. And manufacturers have been partnering with Congress every step of the way to secure tax reform—from the TCJA to the passage of OBBBA and beyond.
In 2017, small manufacturers helped lead the charge in support of the TCJA, which replaced one of the world’s least competitive tax codes with one of the world’s most competitive. In the years following the TCJA, we saw the best manufacturing job creation in 21 years, the best wage growth in 15 years, and significant increases in capital spending across the sector. To preserve this rocket fuel for the manufacturing economy, small manufacturers once again stepped up to the plate in support of the OBBBA, which made permanent the TCJA’s historic reforms.
All of this underscores that the story of the tax bill’s passage reflects the voices, the views, and the hard-won experience of the full swath of the manufacturing sector. This is particularly true for small manufacturers, who faced a significant risk of impending tax hikes scheduled to take effect at the end of this year, threatening 6 million American jobs. When Lisa Winton testified before Congress on the benefits of tax reform, she emphasized the following:
“A competitive tax system is important to manufacturers. Tax reform set the stage for manufacturing growth. In the year following passage of the Tax Cuts and Jobs Act, Winton Machine saw a 49% increase in sales and a 53% rise in machinery shipments. We increased our engineering payroll by 65%, grew our overall labor payroll by nearly 150% and purchased a new, American-made CNC machine. We also saw the positive impact that tax reform had on other manufacturers. My company secured a new customer that accounted for 20% of our annual revenue. Their ability to buy our machines was based largely on their reduced tax burden.
I appreciated the opportunity to meet with legislators, testify at Ways and Means, and work alongside the incredible NAM team and my fellow manufacturers to advocate for this critical tax legislation that will help fuel manufacturing growth in the US.”
– Lisa Winton, CEO, Testifying before the House Ways & Means Committee Field Hearing on the State of the American Economy: The South, August 2023.
This is also why the National Association of Manufacturers has called the One Big Beautiful Bill Act a “manufacturer’s bill” because its tax provisions are directly targeted to support manufacturing investment and competitiveness. Specifically, the bill’s tax policies are underpinned by three key pro-growth principles: 1) competitive tax rates, 2) immediate expensing, and 3) permanence. Here are a few highlights:
1. Competitive tax rates for manufacturers – Whether you are a corporation or a pass-through business, H.R. 1 extends and maintains the competitive tax rates from the Tax Cuts and Jobs Act. Income tax rates set the baseline for how much manufacturers pay in taxes, and without H.R. 1, pass-through businesses in particular would have seen a dramatic tax increase. At the same time, the tax bill narrowed the number of manufacturers and the amount of their assets subject to the death tax. Specifically, the bill included the following provisions:
- Pass-through deduction. Tax reform’s 20% pass-through deduction freed up capital for small and medium-sized manufacturers to reinvest in their employees and their growth. H.R. 1 made permanent the pass-through deduction, further unlocking manufacturers’ ability to invest in America.
- Individual tax rates. Tax reform’s reduction in the individual tax rates was a one-two punch, along with the pass-through deduction, for small and medium-sized businesses across the manufacturing industry. The OBBBA made these pro-growth tax rates permanent for pass-through manufacturers.
- Estate tax exemption. The estate tax harms family-owned manufacturers by forcing the next generation to pay tax on a business—and potentially forcing them to liquidate assets or take on debt to do so—when a loved one passes away. The OBBBA increased the value of assets that a family-owned business can pass on to the next generation without incurring this damaging tax burden. The bill also made the increased exemption level permanent.
2. Immediate expensing in manufacturing investment – As a result of H.R. 1, manufacturers can now immediately expense certain investments, and the good news is that these line up with precisely those investments most critical to manufacturing competitiveness: research and capital. Manufacturers are both research- and capital-intensive, and immediate expensing reduces the cost of those investments, allowing manufacturers to make more of them. Together, low rates and immediate expensing support manufacturing growth and competitiveness.
- Immediate R&D expensing. For nearly 70 years, U.S. manufacturers were able to deduct their R&D expenses fully in the year incurred. But first-year R&D expensing expired in 2022, and manufacturers were required to spread their R&D deductions over several years—making R&D investments significantly more expensive. The OBBBA permanently restored the immediate R&D expensing of domestic R&D costs.
- Full expensing of equipment. Tax reform allowed manufacturers to immediately expense 100% of the cost of capital equipment purchases—enabling them to purchase new equipment and expand their shop floors, leading to increased productivity and job creation. Full expensing began to phase down in 2023 and would have entirely expired in 2027. The OBBBA reinstated full expensing permanently.
- Immediate expensing for factories. The OBBBA includes a new pro-manufacturing provision that would allow companies of all sizes to immediately deduct 100% of the cost of new factories and improvements to existing factories. The deduction applies if construction on the property begins in the years 2025-2028 and if the facility is used for a “qualified production activity,” which is defined to include manufacturing, production, and refining—supporting manufacturers’ efforts to increase their investments here in the U.S
- Interest deductibility. Manufacturers can generally deduct interest on business loans, up to a cap: 30% of a business’s earnings before interest, tax, depreciation, and amortization. But this pro-growth EBITDA standard expired in 2022, and the cap was 30% of a business’s earnings before interest and tax—thereby increasing the cost of the debt financing needed to enable job-creating investments. The OBBBA permanently reinstated the EBITDA standard for interest deductibility.
3. Permanence – H.R. 1 not only implemented a competitive tax code that supports manufacturing investment but made it permanent. Congress rarely enacts permanent tax policy, so much is often left to regular extension legislation to preserve key policies, leaving manufacturers to wrestle with the uncertainty of their forthcoming tax obligations. Immediate expensing for research and equipment, as well as the individual income taxes and pass-through deduction that many small businesses pay, have been made permanent, giving manufacturers the certainty and stability to make long-term investment plans.
These pro-growth policies reduce taxes on manufacturers, improve the tax treatment of the investments most critical to manufacturing competitiveness, and do so on a permanent basis, allowing manufacturers to plan those investments without the uncertainty of looming tax hikes. What this means is more investment, more innovation, more jobs, and more economic growth. As manufacturers work to implement the provisions in OBBBA, it’s time to continue the momentum to deliver on the other pillars of the NAM’s comprehensive manufacturing strategy—which includes permitting reform, sensible trade policies, growing the manufacturing workforce, and modernizing regulations.
Connor Rabb is the Senior Director of Tax Policy for the National Association of Manufacturers.
The National Association of Manufacturers is the largest manufacturing association in the United States, representing small and large manufacturers in every industrial sector and in all 50 states. Manufacturing employs nearly 13 million men and women, contributes $2.90 trillion to the U.S. economy annually and accounts for 53% of private-sector research and development. The NAM is the powerful voice of the manufacturing community and the leading advocate for a policy agenda that helps manufacturers compete in the global economy and create jobs across the United States. For more information about the NAM or to follow us on Twitter and Facebook, please visit www.nam.org.
Disclaimer: The information contained in this communication is intended for general informational and educational purposes only. It is not intended to provide, and should not be relied upon as, financial, tax, accounting, or legal advice. Decisions based on this information may not be appropriate for your specific circumstances. You are strongly encouraged to consult with a certified public accountant (CPA) or other qualified tax professional who can provide advice tailored to your individual needs and applicable laws.
