Candice Horbacz
Ohio policymakers are currently navigating the complexities of state tax conformity to the Internal Revenue Code (IRC) following the recent enactment of the federal One Big Beautiful Bill Act (OBBBA). As a static conformity state, Ohio’s tax code aligns with federal tax laws as of a specific date, necessitating legislative action to incorporate any subsequent changes made by Congress. This dynamic means that when federal tax laws evolve, Ohio must proactively pass legislation to update its own tax statutes, ensuring consistent application and avoiding disparate treatment of taxpayers. The current legislative efforts in Ohio underscore a critical juncture for the state’s innovation economy, aiming to synchronize its tax policy with federal incentives for research and development.
Senate Bill 9: Awaiting Gubernatorial Approval
The Ohio legislature has recently passed Senate Bill 9 (S.B. 9), a pivotal piece of legislation now awaiting Governor Mike DeWine’s signature. This bill is designed to align Ohio’s tax code with federal changes enacted since March 7, 2025, which marks Ohio’s current conformity date. A key provision within these federal changes, brought forth by the OBBBA, is the permanent restoration of immediate first-year expensing for domestic research and experimentation (R&E) expenditures under Section 174 of the IRC. It is important to note that "research and experimentation" is the specific terminology used in the IRC, often more broadly recognized as "research and development" (R&D) in general business contexts. The swift passage of S.B. 9 through the General Assembly reflects a broad consensus on the importance of this alignment for Ohio’s economic future.
Unlike many states that levy a traditional corporate income tax, Ohio employs a Commercial Activity Tax (CAT), which is a gross receipts tax. This distinction means that C corporations in Ohio are not able to claim a traditional deduction for their R&E expenses in the same manner as in states with corporate income taxes. However, Ohio does conform to the IRC for individual income tax purposes. Consequently, the state’s numerous pass-through businesses—including partnerships, S corporations, and sole proprietorships—stand to directly benefit from Ohio allowing immediate R&E expensing rather than requiring these costs to be amortized over several years. This is a crucial point, as pass-through entities form the backbone of much of Ohio’s entrepreneurial and innovative ecosystem, particularly for startups and small-to-medium enterprises (SMEs).
The fiscal implications of conforming to the OBBBA’s changes to Section 174 were a central topic of discussion during committee hearings for S.B. 9. Lawmakers and state fiscal analysts meticulously examined the projected revenue impacts, balancing the immediate "cost" to the state budget in the short term against the anticipated long-term economic benefits and expansion of the tax base. The merits of adopting this provision, therefore, warrant a detailed exploration of its historical context, economic rationale, and specific benefits for Ohio’s diverse industries.
A Retrospective: The Evolving Tax Treatment of Research and Experimentation Expenses
The treatment of R&E expenditures in the U.S. tax code has a long and significant history. For 68 years, spanning from 1954 through 2021, federal law permitted corporations and pass-through businesses to immediately and fully deduct R&E expenditures in the year these costs were incurred. This policy was widely adopted across the nation, with virtually every state that imposed a corporate income tax following this federal standard. Similarly, it was standard practice for pass-through businesses under state individual income tax codes.
This longstanding allowance of immediate deductibility for R&E expenses was rooted in sound economic principles. Like other ordinary and necessary business expenses—such as wages, rent, and utilities—R&E investments are fundamental costs of doing business. Taxing businesses based on net income, defined as revenues less expenses, logically dictates that R&E should be immediately deductible. This approach prevented innovators’ net profits from being artificially overstated for income tax purposes, thereby avoiding a tax penalty on essential investments in innovation. The policy was designed to stimulate economic growth by encouraging businesses to invest in new technologies, products, and processes without facing an immediate tax burden on those investments.
A significant shift occurred with the enactment of the Tax Cuts and Jobs Act (TCJA) of 2017. This landmark federal tax reform legislation introduced a controversial change, requiring businesses to capitalize and amortize domestic R&E expenditures over a five-year period, effective for tax years beginning after December 31, 2021. However, this policy change was reportedly not the original intent of the TCJA’s drafters. Instead, it was conceived as a "pay-for"—a cost-saving mechanism—designed to lower the overall estimated cost of the TCJA toward the end of its projected 10-year budget window. The prevailing expectation among policymakers was that subsequent legislation would be passed to prevent this amortization requirement from ever taking effect. Consequently, many lawmakers expressed surprise when the amortization requirement indeed took effect in 2022, creating an immediate and substantial impact on businesses heavily invested in R&D.
The period during which this amortization policy was in effect proved economically detrimental, particularly for corporations, pass-through businesses, and burgeoning startups that rely heavily on innovation. This harm was exacerbated in states like Ohio that remained conformed to the federal policy during those years. Such a policy effectively penalizes R&E activities by increasing businesses’ taxable income and reducing their critical cash flow, especially when compared to other categories of business expenses that continued to be fully and immediately deductible. Businesses found themselves paying taxes on income that had not yet materialized, hindering their ability to reinvest in future innovation and growth.
The One Big Beautiful Bill Act (OBBBA) and Federal Restoration
The federal landscape changed again with the passage of the One Big Beautiful Bill Act (OBBBA). This significant legislative package, passed in early 2025, restored the immediate cost recovery of domestic R&E expenses for tax years beginning after December 31, 2024. This restoration represents a clear acknowledgement by federal lawmakers that immediate cost recovery for R&E is a pro-growth tax policy. It effectively removes the previous tax penalty on investments in innovation, thereby encouraging businesses to undertake more R&D activities and driving broader economic activity across the business community.
For states like Ohio that are now considering conforming to the OBBBA’s restoration, the fiscal impact presents a unique dynamic. Conforming will result in a "front-loaded cost" to the state budget in the initial year. This is because new immediate deductions will be combined with the ongoing amortized deductions from investments made in prior years (when amortization was required). However, state fiscal analysts predict that these costs will decrease in subsequent years. Once the previous assets complete their amortization schedules, any future R&E investments will be deducted immediately without additional lingering deductions. This mechanism is crucial because restoring business cash flow frees up resources that companies can then reinvest in expansion, hiring, and further innovation. As businesses grow and become more profitable due to these re-investments, the state’s overall tax base is expected to expand over time, potentially offsetting initial revenue reductions and leading to long-term fiscal health.
Tax Bases and the Pursuit of Competitiveness
In recent years, many states across the U.S. have strategically utilized tax reform and relief as instruments to stimulate economic growth and enhance their regional and national competitiveness. Ohio has been a participant in this trend. In 2023, for instance, the state undertook significant reforms, consolidating its individual income tax brackets and initiating a transition toward a lower, single-rate tax structure. These efforts aimed to make Ohio a more attractive location for both individuals and businesses.
While reductions in income tax rates are indeed a powerful pro-growth reform, tax competitiveness is a multifaceted concept that extends beyond just headline tax rates. The overall tax structure plays an equally, if not more, critical role. Conforming to the federal tax code’s business expensing provisions, particularly Section 174, allows businesses to retain more capital for reinvestment in their operations, rather than facing a tax penalty on capital expenditures. This policy fosters an environment where innovation is encouraged, not burdened.
Research and experimentation are widely recognized for generating positive externalities. Businesses that innovate do not merely benefit themselves; their discoveries and advancements often create spillover effects that benefit other businesses, entire industries, and the public more broadly through new technologies, improved products, and enhanced productivity. This virtuous cycle, in turn, is a powerful engine for promoting long-term economic growth and job creation within the state. By aligning its tax policy with federal R&E expensing, Ohio aims to maximize these spillover benefits, positioning itself as a leader in innovation-driven economic development.
Full Expensing: A Catalyst for Ohio’s Innovation Ecosystem
Ohio’s economy is robust and diverse, drawing strength from a wide array of industries. Among its most notable sectors are healthcare, defense, and manufacturing—all of which are heavily reliant on continuous innovation. Full expensing for R&E is poised to significantly benefit these critical components of Ohio’s economic fabric.
The healthcare sector in Ohio is a colossal employer and a vibrant hub for life sciences innovation. According to the Ohio Department of Development, the state’s major hospital systems collectively employ over 303,000 healthcare workers, making them among Ohio’s largest employers. The Cleveland Clinic, globally recognized as one of the top-ranked hospitals and home to numerous innovation centers, stands as the state’s single largest employer, providing livelihoods for 63,641 individuals. This robust healthcare infrastructure provides a fertile ground for a rapidly expanding life sciences innovation economy. The sector’s inherent strength has fueled substantial statewide investment in pharmaceutical research, advanced medical device development, and cutting-edge biomedical engineering. A 2025 report by the Ohio Life Sciences Association highlighted that Ohio surpasses the national average in its patent activity related to life science technology, relative to its Gross State Product (GSP), underscoring the state’s prowess in this field. Immediate expensing of R&E costs will directly empower these institutions and their spin-off companies to invest more aggressively in groundbreaking research, accelerating the development of new treatments and technologies.
Ohio also boasts a profound and enduring legacy in aviation and defense innovation. While the iconic first airplane flight by Orville and Wilbur Wright occurred in North Carolina, much of the foundational research and experimentation that made it possible took place in Dayton, Ohio. Following their patent, the Wright brothers returned to Dayton and established a collaborative relationship with the city’s Air Force base—now known as Wright-Patterson Air Force Base—to further advance aviation research and manufacturing. Today, Dayton remains a preeminent hub for aerospace and defense technology. Wright-Patterson Air Force Base, with its more than 33,000 civilian and military personnel, is a cornerstone of this ecosystem. However, private sector defense contracting firms play an indispensable role in bridging the gap between the need for innovation and the translation of those innovations into national security capabilities. These firms employ thousands of highly skilled engineers, information technology professionals, and supply chain experts. Increasingly, smaller startups and specialized firms contribute to the innovation pipeline, supporting the larger defense contractors and fostering a dynamic environment for technological advancement. For these businesses, immediate R&E expensing means more capital available to develop next-generation defense solutions.
Manufacturing represents another colossal economic driver for Ohio. The state is a manufacturing powerhouse, with three of its top five manufacturing employers headquartered within its borders. As of December 2025, approximately 693,000 Ohioans were employed in manufacturing, accounting for a significant 14 percent of Ohio’s private sector workforce. The Ohio Manufacturing Association reports that every single 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. Shelby County, located just north of Dayton, exemplifies the sector’s dominance, with nearly half (46.5 percent) of all jobs being manufacturing-related. Ohio ranks third nationally in manufacturing jobs, behind California (10.3 percent) and Texas (7.4 percent), holding 5.3 percent of the nation’s total. Manufacturing in Ohio is not merely a major employer; it is the vital link that enables the innovations pioneered within the state to be produced and scaled locally, creating a comprehensive economic cycle from research to production. Full expensing will incentivize manufacturers to invest in process improvements, automation, and new product lines, enhancing their global competitiveness.
While life sciences, defense, and manufacturing represent only a fraction of Ohio’s innovation-dependent industries, the intricate interplay and mutual reliance among these three sectors alone underscore the critical importance of fostering continued investment in research and experimentation. If Ohio aims to maintain and strengthen its leadership in job creation, biomedical technology, national defense capabilities, and advanced manufacturing, it must adopt policies that vigorously support innovation.
Final Considerations and Broader Impact
The continued health and growth of Ohio’s key industry sectors are intrinsically linked to ongoing research and experimentation, driven not only by large corporations but also, significantly, by pass-through businesses, including startups and smaller firms. The state’s economic vitality is directly influenced by how its tax code treats these crucial investments. While many state tax codes include various research and development tax credits, these are often designed in a non-neutral manner, inadvertently benefiting some firms more than others or proving inaccessible to smaller, nascent businesses. This reality makes full and immediate R&E expensing all the more vital, as it offers a broad-based incentive that benefits all innovators equally, irrespective of their size or specific industry niche, without the complexities and limitations of targeted tax incentives.
The expected signing of Senate Bill 9 by Governor DeWine, thereby conforming Ohio to the OBBBA’s full expensing for R&E expenditures under Section 174, represents an important and strategic move. It is a critical means of further enhancing Ohio’s competitive position, reinforcing its reputation as a leader in innovation, and ensuring that the state remains an attractive destination for businesses looking to invest, grow, and create jobs in the dynamic 21st-century economy. This alignment will send a clear signal to businesses that Ohio values and supports their commitment to groundbreaking research and development, solidifying the state’s foundation for sustained economic prosperity.
