R&D Expensing, Part of Trump Tax-Law Debate, Would Reward Big Pharma, Even As Drug Firms Keep Raising Prices on Consumers & Government
Eight big U.S. drug corporations are part of a business lobby fighting to restore a tax break that could have saved them up to a collective $15.4 billion in a recent year, according to a new analysis by Americans for Tax Fairness (ATF) and Lower Drug Prices Now (LDPN). The firms are pushing for the return of their big tax break even as they continue to jack up prescription drug prices on patients and public-healthcare programs. The effort to bring back so-called “expensing” of research and development (R&D) costs is just one part of the broader legislative battle over the fate of the 2017 Trump-GOP tax law, most of which is scheduled to expire at the end of this year.
Big Pharma’s bid to bring back this lucrative loophole comes as the industry continues to gouge consumers. Drug companies hiked the price of nearly 2,000 prescription drugs by more than the rate of inflation—or an average of 15.2%—between 2022 and 2023. Those pumped up prices contributed to tens of billions of dollars in profits enjoyed by the biggest pharmaceutical firms, which in turn showered their wealthy investors with billions of dollars more in stock buybacks and dividends.
Corporations claim the loss of expensing will cause them to spend less on research. But there was a 27% increase in R&D spending among the top eight drug companies between 2021, when they could expense their costs that year, and 2023, when they were required to write them off over time. Most of this increase was caused by a nearly three-fold jump in Merck’s R&D spending. But even excluding Merck, research spending was essentially unchanged between the two years (down 1%). This indicates that R&D expensing is just a tax handout to companies that would be spending the money anyway.
To help disguise the full price of their 2017 law—which overwhelmingly favored rich households and big corporations—Republicans included some prospective tax hikes on businesses that they assumed would be repealed before coming into effect. One of those, a tightening of the rules for how businesses can deduct R&D costs from their reportable income to reduce tax bills, came into effect in 2022. It was one of three such rule changes that demand higher taxes from profitable corporations and that, to the surprise of many knowledgeable observers, have come into play this decade. Drug companies and other huge corporations are now working furiously to repeal them as part of the larger tax debate.
R&D expensing allows companies to deduct from their taxable income the entire cost of research and development in the year the money was spent, even for products and projects that will pay off for many years to come. This runs counter to the accounting principle that requires companies to write off the expense of long-range investments (such as buildings and machinery) over time instead of all at once. Since 2022, firms have had to deduct their R&D costs piecemeal—in this case, over five years—just like they do other long-term expenses.
Source: Wall Street Journal
The value of the R&D deduction assumes the companies paid the statutory corporate tax rate of 21%. Their first year tax cost would be greater if their effective tax rate was higher, less if their effective rate was lower.
Even though under the new rules companies are allowed to eventually write off the entire cost of their research, deducting the full amount in the year spent is more valuable because of the time value of money: they have access to their full tax savings immediately to use for investments and don’t have to worry about it being eroded by inflation.
Big Pharma’s effort to restore R&D expensing comes amid a multitude of tax breaks the industry already enjoys. The 2017 Republican law cut the corporate tax rate by two-fifths—from 35% to 21%—and that change was made permanent. Corporations are also able to write off many other expenses besides R&D, including state and local taxes, charitable contributions, and even all those TV ads for the latest miracle drug.
Even as pharmaceutical companies fight to restore a money-saving tax break for themselves, they’re fighting just as hard to repeal a recent reform that’s saving the Medicare program and its beneficiaries billions of dollars in prescription-drug costs. In 2022, President Biden and congressional Democrats enacted the Inflation Reduction Act (IRA), which among other reforms removed the restriction on Medicare negotiating prescription drug prices with Big Pharma on behalf of taxpayers and patients.
Finally free to negotiate like other big healthcare providers— including private insurance companies and the Department of Veteran Affairs—Medicare has achieved price cuts of up to 79% on the first 10 drugs included in the new program. Next year alone, these negotiated price reductions will save American taxpayers around $6 billion in Medicare expenditures and patients some $1.5 billion in out-of-pocket expenses. The IRA also capped the cost of insulin for Medicare clients at $35 a month and limited their overall out-of-pocket drug expenses.
Big drug corporations have been pushing ever since the IRA was signed into law to reverse the reform and once again forbid Medicare from seeking lower prices. Individual drug corporations and business lobbies to which they belong have filed multiple lawsuits to reverse the Medicare-drug-negotiation reform in the IRA. So far, none have succeeded on the merits, but with so much money at stake the issue is likely to wind up at the Supreme Court.
It’s particularly unfair that drug companies want to increase the tax break they get for research costs, since American taxpayers already pick up roughly half the tab for pharmaceutical research through the publicly funded National Institutes of Health (NIH). A recent academic study found that over the decade 2010-19 NIH research contributed to the development of all but two of the 356 drugs approved for use in the U.S. That public investment totaled $187 billion, roughly the same amount as was spent by private drug companies. The difference is that the drug companies can make huge profits from successful drugs, while taxpayers get no financial return on their investment—and in fact wind up paying again for often overpriced drugs.
In fact, patients and taxpayers pay three times for the prescription drugs they need to survive and thrive: first, through publicly funded research; then, through the tax loopholes big pharmaceutical corporations use to dodge their fair share of taxes, leaving us to pick up the tab; and finally at the pharmacy counter through sky-high prices. Big Pharma doesn’t need more tax breaks—it needs to stop ripping off the American people.
“Big Pharma is one more powerful interest bellying up to the corporate-tax-break window opened wide by President Trump and congressional Republicans,” said David Kass, ATF’s executive director. “Even as drug companies continue to squeeze patients and government programs like Medicaid and Medicare with ever higher prices, they want to trim their tax bills in order to better reward their CEOs and shareholders. It’s just one corner of this year’s big tax battle, but it’s a good example of the stakes: do we further reward rich individuals and profitable corporations with ever more tax cuts, or do we use that money to reduce costs of necessities like healthcare, education and housing for ordinary families?”
“For decades, drug manufacturers have raised their prices faster than inflation by using their monopoly power to set and raise prices to gouge consumers on everything from insulin to cancer treatments,” said Margarida Jorge, campaign director of Lower Drug Prices Now. “The last thing working Americans need is for Congress to reward these pharmaceutical manufacturers with more tax breaks for ripping off patients and taxpayers. On the contrary, Congress should be making profitable corporations pay their fair share of taxes to support the economy that is fueling their profits. These corporations have enjoyed enough big breaks at our expense.”