The Big Story: Tax package fails Senate vote in blow to innovation
Months after a successful and overwhelmingly bipartisan House vote, the Senate failed yesterday to advance the Tax Relief for American Families and Workers Act, a pivotal piece of legislation for the startup ecosystem. If passed, it would have restored immediate expensing for domestic R&D expenditures, lowering startups’ tax bills and increasing their capacity to innovate. The package also would have temporarily expanded the child tax credit (CTC), helping founders—especially women—who are parents to pursue entrepreneurship while raising families. Startup founders continue to face significant tax obligations—they do not have time to wait for Congressional action.
The current tax environment is dampening innovative activity. In the past, companies engaged in R&D were able to offset the significant cost through immediate expensing, but the 2017 Tax Cuts and Jobs Act (TCJA) forced companies to capitalize and amortize R&D expenses beginning in 2022. As a result, startups have been forced to grapple with significant tax burdens, with some forced to divert funds away from R&D and hiring. This domino effect stifles startup growth and limits the strength of the startup ecosystem, particularly as many other countries permit immediate expensing.
Failure to pass the package is also a blow to startup founders who are parents, many of whom benefitted from the extra cushion provided by TCJA’s past expansion of the CTC. An expanded CTC is particularly crucial now, as the maximum value of the credit will drop in 2026. Last year 60 women startup founders called for immediate action on the CTC, urging Congress to permanently expand the credit, so women are more able to pursue entrepreneurship and grow their companies. The Senate’s failure to pass the tax package threatens the U.S. innovation ecosystem and policymakers must prioritize a fix to R&D expensing and to the CTC swiftly.
Policy Roundup:
Senate passes contentious Internet regulation package. The Senate on Tuesday passed a legislative package that would dramatically alter how startups design their products and interact with their users. Despite well-intentioned efforts to improve the Internet for young users, the legislation carries serious negative consequences for First Amendment-protected expression, user privacy and cybersecurity, and startup competitiveness. In practice, it would require startups to change how they deliver content to their users and would necessitate costly, privacy-invasive age verification technologies. Industry groups have successfully challenged state laws with similar provisions, and this week sued Texas over one such law. The federal package now moves to the House, where lawmakers have acknowledged problems with the legislation, including its impacts on startups.
Senate committee advances artificial intelligence legislation. This week, the Senate passed several pieces of AI legislation out of the Commerce Committee that would lead to government AI resources for startups and the creation of voluntary guidance for AI development. Among the advanced legislation is the CREATE AI Act, which would authorize the National AI Research Resource, a program that will help grow the AI talent pool and provide resources directly to startups—and that Engine and several startups had weighed in to help create. Ahead of the markup, Engine underscored the importance of enhancing government AI resources, expanding the talent pool, and pursuing consensus-based voluntary guidance to boost U.S. startup competitiveness. Although floor time is limited for the remainder of this Congress, Senate leadership will likely look to attach the bills to the annual defense authorization package later this year.
Senate committee approves funding for broadband subsidy program. On Wednesday, a Senate committee approved an amendment to the PLAN for Broadband Act to allocate $7 billion for the Affordable Connectivity Program (ACP), a key broadband subsidy that expired earlier this year. House Representatives also introduced the Secure and Affordable Broadband Extension Act this week that would similarly direct $6 billion towards the ACP, $3 billion towards the Rip and Replace program, and use an FCC spectrum auction to offset the cost. As major broadband providers report significant subscriber losses totaling 269,000 in the most recent quarter since ACP expired, the urgency for these bills heightens. Funding ACP is critical for closing the digital divide and fostering an accessible innovation ecosystem.
Agency report extols virtues of openness in AI. This week, the National Telecommunications and Information Administration (NTIA) released a report on widely available model weights that underscored the values of openness in AI. The report, which was prompted by President Biden’s Executive Order on AI, emphasizes how open AI models can lower barriers to entry, improve innovation, and enhance startup competitiveness. The report also notes the need to continue monitoring for risks, but it does not advocate stringent measures to regulate AI in ways that would lead to restrictions on open source, like proposals being considered by some states. As we wrote in comments to NTIA as part of the report, openness leads to reductions in costs, benefits startups, and policymakers should support—not restrict—open source AI resources that promote growth.
New bill could increase abusive patent litigation directed at startups. The RESTORE Patent Rights Act of 2024 was introduced in both the House and Senate on Tuesday, seeking to overturn the eBay v. MercExchange decision that introduced a four-factor test to weigh whether a permanent injunction should be granted in cases of patent infringement. This legislation proposes to return to the previous standard of a rebuttable presumption for injunctive relief when infringement is found, a move that could hinder innovation by making it easier for large incumbents to stifle competition through aggressive litigation. Balanced patent laws are important for protecting truly novel inventions without enabling anti-competitive practices that could lock out emerging startups.
