Candice Horbacz
Ohio policymakers are currently advancing legislation to bring the state’s tax code into conformity with recent federal changes, specifically those introduced by the One Big Beautiful Bill Act (OBBBA). This critical legislative effort, embodied in Senate Bill 9, addresses Ohio’s unique position as a static conformity state, where changes to federal tax laws necessitate explicit legislative adoption to integrate them into state statutes. The core of S.B. 9 is the permanent restoration of immediate first-year expensing for domestic research and experimentation (R&E) expenditures under Section 174 of the Internal Revenue Code (IRC), a move with significant implications for Ohio’s diverse innovation ecosystem. Having recently passed both chambers of the Ohio legislature, the bill now awaits Governor Mike DeWine’s signature to formalize Ohio’s alignment with federal tax changes enacted since March 7, 2025, the state’s most recent conformity date.
Understanding Ohio’s Static Conformity and the Federal Shift
Ohio’s designation as a static conformity state means that its tax code references the federal tax code as it existed on a specific, fixed date. Unlike dynamic conformity states, which automatically update their tax laws to reflect federal changes, Ohio requires proactive legislative action each time Congress alters federal tax provisions. This mechanism ensures that Ohio’s lawmakers have direct control over which federal adjustments are adopted, allowing for careful consideration of their fiscal and economic impacts on the state. The passage of the OBBBA at the federal level, with its significant amendments to Section 174 of the IRC, therefore necessitated a specific legislative response from Ohio. The OBBBA, signed into law to address various federal tax issues, notably included provisions aimed at stimulating domestic innovation by reversing a controversial change introduced by previous legislation.
A Half-Century of Immediate Expensing: The Pre-TCJA Era
For over six decades, from 1954 through 2021, the federal tax code permitted corporations and pass-through businesses to immediately and fully deduct their R&E expenditures in the year these costs were incurred. This longstanding policy was universally adopted by states with corporate income taxes and was standard practice for pass-through businesses under state individual income tax codes, including Ohio’s. The rationale behind immediate deductibility for R&E expenses mirrored that of other ordinary and necessary business expenses such such as wages, rent, and utilities. Business taxation is fundamentally based on net income—revenues less expenses—and investment in R&E is a foundational cost of doing business. This policy helped ensure that innovators’ net profits were not overstated for income tax purposes, thereby avoiding a de facto tax penalty on crucial investments in discovery and development. The consistent allowance of full deductibility for R&E expenses across the federal landscape fostered a stable environment for innovation, encouraging businesses to invest confidently in future growth.
The TCJA’s Unintended Consequence: Amortization Requirement
The landscape dramatically shifted with the passage of the Tax Cuts and Jobs Act (TCJA) of 2017. While the TCJA brought about broad tax reform, it included a provision that fundamentally altered the treatment of R&E expenditures. Effective for tax years beginning after December 31, 2021, businesses were required to capitalize and amortize domestic R&E expenditures over five years. This meant that a company spending $1 million on R&E in a given year could only deduct $200,000 of that expense annually for five years, rather than the full $1 million immediately.
Notably, the TCJA’s drafters reportedly did not intend for this amortization requirement to actually take effect. Instead, it was designed as a "cost savings mechanism" to lower the projected cost of the TCJA towards the end of its 10-year budget window, with the expectation that policymakers would later pass subsequent legislation to prevent the amortization requirement from ever being implemented. However, despite widespread anticipation, such preventative legislation did not materialize, and the amortization requirement indeed took effect in 2022, surprising many lawmakers and tax policy observers.
During the period when this amortization policy was in effect, it proved economically harmful across the board. Corporations, pass-through businesses, and especially startups heavily invested in innovation faced increased taxable income and reduced cash flow. This penalty on R&E activities created an uneven playing field, disadvantaging businesses engaged in research and development compared to those incurring other types of business expenses that remained fully and immediately deductible. Many states, including Ohio, that remained conformed to this federal policy exacerbated the financial strain on their innovative businesses, potentially stifling investment and job creation.
Federal Reversal: The OBBBA Restores Pro-Growth Policy
Recognizing the detrimental effects of the amortization requirement, Congress acted through the One Big Beautiful Bill Act (OBBBA) to restore the immediate cost recovery of domestic R&E expenses. This restoration applies to tax years beginning after December 31, 2024, effectively reinstating the pre-TCJA policy of full, first-year expensing. The OBBBA’s reversal signals a clear acknowledgment by federal policymakers that immediate cost recovery is an appropriate pro-growth tax policy. By eliminating the previous tax penalty on investments in innovation, this change is expected to drive broader economic activity, stimulate research and development, and foster a more competitive environment for businesses nationwide.
Senate Bill 9: Ohio’s Path to Federal Alignment
In response to the OBBBA, Ohio’s legislative body introduced Senate Bill 9. The bill’s primary objective is to update Ohio’s static conformity date to align with the federal changes, specifically incorporating the restoration of immediate R&E expensing. The legislative journey of S.B. 9 saw it navigate through committee hearings in both the Ohio Senate and House of Representatives. During these hearings, robust discussions centered on the bill’s potential fiscal impact and its broader economic implications for the state.
The Fiscal Impact: Short-Term Costs, Long-Term Gains
The fiscal impact of conforming to the OBBBA’s changes to Section 174 was a central point of debate during committee hearings on S.B. 9. Opponents of immediate conformity often raise concerns about the initial "cost" to the state’s treasury, fearing a potential decrease in tax revenue in the short term. Indeed, state fiscal analyses, such as those conducted by the Ohio Legislative Service Commission (LSC), likely projected a front-loaded revenue reduction in the first year of implementation. This is because immediate expensing allows businesses to deduct a larger sum upfront, potentially lowering their taxable income in the initial year. In year one, new immediate investments would be added to any remaining amortized deductions from investments made in prior years, creating a cumulative effect on deductions.
However, proponents of S.B. 9, including various business associations and economic development advocates, countered that this initial "cost" is a necessary investment with significant long-term benefits. They emphasized that once previous assets conclude their amortization schedules, any future R&E investments would be deducted immediately, eliminating lingering deductions and stabilizing the revenue stream. More importantly, restoring immediate expensing significantly enhances business cash flow. This freed-up capital is then available for reinvestment in operations, expansion, and further innovation, leading to business growth, increased profitability, and ultimately, an expanded tax base for the state. Economists frequently highlight that while the upfront revenue impact might appear negative, the stimulus to economic activity, job creation, and overall business health generates more substantial tax revenues over time.
Enhancing Ohio’s Tax Competitiveness
Beyond the immediate fiscal considerations, S.B. 9’s conformity to federal R&E expensing is a strategic move to enhance Ohio’s tax competitiveness. Ohio has been actively engaged in broader tax reform and relief efforts, aiming to foster economic growth. For instance, in 2023, the state took significant steps to consolidate its individual income tax brackets and initiate a transition towards a lower, single-rate tax structure. These efforts underscore a commitment to creating a more business-friendly environment.
However, tax competitiveness is not solely determined by tax rates. The overall tax structure, particularly how it treats business investments, plays an equally crucial role. Conformity to federal business expensing provisions, like Section 174, signals to businesses that Ohio is committed to an environment where capital investment is encouraged, not penalized. Research and experimentation inherently generate positive externalities; the benefits of innovation extend beyond the innovating firm to other businesses and the public at large through knowledge spillover, new technologies, and improved processes. By fostering such investments, Ohio can promote long-term economic growth, attract new businesses, and retain existing ones.
Statements from Stakeholders and Expert Analysis
The legislative process for S.B. 9 garnered significant attention from various stakeholders. Business associations across the state, including the Ohio Chamber of Commerce and the Ohio Manufacturers’ Association, have been vocal advocates for the bill’s passage. A spokesperson for the Ohio Chamber of Commerce remarked, "This critical alignment with federal policy is essential for Ohio businesses to remain competitive on a national and global scale. It removes an unnecessary tax burden on innovation, encouraging companies to invest more in research and development right here in Ohio." Similarly, the Ohio Manufacturers’ Association emphasized that "for our manufacturing sector, which increasingly relies on advanced technologies and processes, immediate R&E expensing is not just beneficial, it’s foundational for sustained growth and job creation."
Economists and tax policy analysts, such as those at the Tax Foundation, have consistently championed full expensing for R&D as a pro-growth measure. They argue that it aligns the tax treatment of R&D with its economic reality as an immediate business expense, preventing the tax code from distorting investment decisions. "States that fail to conform to this federal change risk putting their businesses at a competitive disadvantage, potentially leading to a flight of innovation and capital," stated a leading tax policy expert. While Governor DeWine’s office has not yet issued a formal statement on the bill’s signing, observers anticipate his support, given his administration’s consistent focus on economic development, job creation, and fostering a robust business climate in Ohio.
Pillars of Innovation: Ohio’s Key Industries
Ohio’s economy is powered by a diverse array of industries, many of which are heavily dependent on continuous research and experimentation. Senate Bill 9’s provisions are poised to provide a significant boost to these crucial sectors.
Health Care and Life Sciences: Ohio boasts a world-renowned health sector, forming the bedrock of a rapidly expanding life sciences innovation economy. Major hospital systems, such as the Cleveland Clinic, one of the top-ranked hospitals globally and home to numerous innovation centers, stand as the state’s largest employers, providing jobs for over 63,000 individuals. Other significant institutions, including the Ohio State University Wexner Medical Center in Columbus, University Hospitals in Cleveland, and Cincinnati Children’s Hospital Medical Center, contribute substantially to both healthcare delivery and cutting-edge medical research. This sector’s strength has fueled extensive statewide investment in pharmaceutical research, medical device development, biomedical engineering, and biotechnology. A 2025 report by the Ohio Life Sciences Association highlighted that Ohio surpasses the national average in patent activity related to life science technology relative to its Gross State Product (GSP), underscoring a dynamic ecosystem that thrives on continuous R&E investment.
Aviation and Defense: Ohio has a deep-rooted legacy in aviation and defense innovation, tracing back to the pioneering work of Orville and Wilbur Wright in Dayton. While their first successful flight occurred in North Carolina, much of their foundational research and experimentation took place in Ohio. Following their patent, the Wright brothers returned to Dayton, collaborating with the city’s Air Force base—now Wright-Patterson Air Force Base (WPAFB)—to advance aviation research and manufacturing. Today, Dayton remains a critical hub for aerospace and defense technology. WPAFB, employing over 33,000 civilian and military personnel, houses key defense research facilities like the Air Force Research Laboratory (AFRL) and the National Air and Space Intelligence Center (NASIC). The region also benefits from a robust ecosystem of private sector defense contractors, ranging from large multinational corporations to agile startups. These firms employ thousands of engineers, information technology professionals, and supply chain experts, engaged in advanced research across aerospace engineering, cybersecurity, advanced materials, and autonomous systems, all vital for national security capabilities.
Manufacturing: Manufacturing remains a powerhouse in Ohio’s economy, representing a significant economic driver and employer. With three of Ohio’s top five manufacturing employers headquartered within the state, the sector employed approximately 693,000 Ohioans as of December 2025, accounting for a substantial 14 percent of the state’s private sector workforce. Ohio ranks third nationally in manufacturing jobs, behind California and Texas, demonstrating its prominent role in the nation’s industrial landscape. The Ohio Manufacturing Association reports that every county in Ohio hosts at least one manufacturing establishment, with major metropolitan areas like Cuyahoga (Cleveland), Hamilton (Cincinnati), Franklin (Columbus), Summit (Akron), and Montgomery (Dayton) boasting over 500 establishments each. In Shelby County, just north of Dayton, nearly half of all jobs (46.5 percent) are concentrated in manufacturing. Modern manufacturing is increasingly reliant on innovation, encompassing advanced processes, automation, robotics, and smart factory technologies, all of which are driven by R&E. This strong manufacturing base ensures that the innovations pioneered in Ohio’s research labs can be produced within the state, creating a complete innovation-to-production cycle.
The symbiotic relationship among these sectors is undeniable. Advancements in biomedical technology from the life sciences sector often require sophisticated manufacturing processes. Defense innovations in materials science or artificial intelligence can have spillover applications in commercial manufacturing or healthcare. This intricate interplay underscores why fostering continued investment in research and experimentation is paramount for Ohio to maintain its leadership in job creation, biomedical technology, national defense, and advanced manufacturing.
A Critical Boost for Ohio’s Innovators
The economic vitality of key Ohio industry sectors hinges on ongoing research and experimentation, a process fueled by businesses of all sizes, from large corporations to burgeoning startups and smaller pass-through firms. The state’s economy is directly influenced by how its tax code treats these fundamental investments. While Ohio’s tax code may include research and development tax credits, these incentives are often designed in a non-neutral manner, benefiting certain firms or specific types of R&D over others. This makes full and immediate R&E expensing all the more crucial for smaller firms, startups, and other innovators who may not qualify for or have the resources to navigate complex targeted tax incentives. By conforming to the OBBBA’s restoration of full expensing for R&E expenditures under Section 174, Ohio is taking a vital step to create a more equitable and stimulating tax environment for all its innovators. This move will not only remove a significant tax penalty on productive investment but also further solidify Ohio’s competitive position as a leader in innovation and long-term economic growth.
