The Big Story: Presidential race turns to tax policy
The presidential race has increasingly focused on tax policy, with proposals that could have significant implications for the startup ecosystem. This week, Vice President Kamala Harris introduced a plan to significantly increase the deduction for startup expenses from $5,000 to $50,000, aiming to alleviate the financial burdens of launching a small business and encourage entrepreneurship and innovation. These conversations are taking place as Congress prepares to deliver a 2025 tax package to address expired and expiring provisions of the 2017 Tax Cuts and Jobs Act (TCJA), including one that ended the ability of companies to immediately expense R&D costs, which has slowed startup innovation.
Policymakers are expected to consider a number of policies that affect the innovation ecosystem. Expiring provisions include the 20 percent pass through deduction, which lowers the marginal tax rate for many companies, and the current child tax credit rate, which will revert to pre-TCJA levels of a maximum credit of $1,000 per child. Policymakers are also considering other provisions to pay for the hefty price tag that will likely accompany a future tax package, including a proposed increase to the long term capital gains tax rate. Vice President Harris has proposed an increase in the corporate tax rate—which saw a massive cut from 35 percent to 21 percent under TCJA benefitting U.S. businesses—while former President Trump has proposed cutting the rate even further.
Startups are particularly impacted by shifts in the tax code, often relying on tax benefits to ease the costs associated with launching and growing a startup—including R&D. Founders are still waiting for policymakers to implement a return to immediate expensing for R&D costs, for which both Democrats and Republicans—including former President Trump—have expressed support. As we approach 2025, policymakers must prioritize the needs of the startup ecosystem as they work their way through tax reform. Policies that encourage startup growth are critical to ensuring the U.S.’ competitive edge in innovation.
Policy Roundup:
Innovation-threatening AI bill heads to governor’s desk, Engine calls for veto. California's SB 1047, a bill aimed at regulating "frontier" AI models, passed the state legislature last week and is now awaiting Gov. Gavin Newsom’s (D) signature. The bill introduces significant compliance burdens that would disincent AI development and the availability of open-source models, threatening to stifle innovation. Following passage, a coalition of tech groups urged Gov. Newsom to veto SB 1047 to avoid harming the state's thriving startup ecosystem.
Federal court upends legal framework for algorithmic recommendations. This week, a federal appeals court ruled that a lawsuit against TikTok for content its algorithm promoted could proceed, threatening the legal framework relied upon by content-hosting startups. The ruling marks a stark departure from existing jurisprudence around Section 230, a foundational Internet law that allows Internet platforms to host and moderate user content without fear of ruinous litigation. The ruling is likely to be challenged, but this shift in legal understanding would particularly impact smaller platforms that host user-generated content but lack the resources of larger tech companies to handle costly and extensive legal battles.
Supreme Court ruling leaves student debt relief uncertain. Last week, the Supreme Court refused to reinstate President Biden’s SAVE (Saving on a Valuable Education) student loan repayment plan, leaving millions of borrowers in uncertainty. The SAVE plan, designed to reduce monthly payments and provide quicker loan forgiveness, is now paused until the Eighth Circuit rules on its legality. And just days later, following a suit filed by seven Republican-led states, a federal court in Georgia temporarily blocked the administration’s most recent plans to discharge student debt, including for those who have accrued significant interest on their original balance. These most recent decisions add confusion for borrowers and stifle innovation and economic growth, particularly for Black women who are disproportionately affected by the student debt crisis. Policymakers should immediately take steps to ease the crisis, enabling entrepreneurship as a career pathway for countless borrowers.
U.S. pushes back on Canada’s discriminatory digital tax. This week, U.S. Trade Representative Katherine Tai initiated a process under the U.S.-Mexico-Canada Agreement (USMCA) to challenge Canada’s newly implemented and retroactive digital services tax (DST). The DST, which stands to cost large U.S. technology companies billions of dollars, also threatens the startup ecosystem, as most companies rely on these tech companies for low cost digital services. Though startups aren’t the intended target of the DST, affected companies are expected to pass the cost of the tax on to consumers through increased prices. Failure to address the implications of Canada’s DST could set a global precedent paving the way for future DSTs absent a global tax agreement, complicating digital trade, and impacting startups that rely on digital services both in Canada and internationally.
Texas court blocks immigration relief for immigrant spouses of U.S. citizens. A federal judge in Texas on Wednesday extended a block on the Biden administration’s Keeping Families Together program, which aimed to provide a pathway to permanent residency and work permits to undocumented immigrants married to U.S. citizens, through September 23. Engine has repeatedly stressed the need to bolster the U.S. talent pool, particularly for the innovation ecosystem. Those affected include individuals who have been contributing to the U.S. economy for more than two decades.
Startup Roundup:
#StartupsEverywhere: San Francisco, California. With a background in chemical engineering and economics, and a career spanning strategy consulting and tech product management, Maverick’s co-founder embarked on a new journey in 2019. After years in San Francisco’s tech scene, he and his co-founder launched Maverick, an AI-driven platform that creates personalized video content for e-commerce brands. We delve into how Maverick operates, its place in the AI ecosystem, and the impact of current policies and startup issues on its future.
