Turns Out Research Tax Breaks Alone Can't Conjure Developers

Forbes

2 days ago

In the One Big Beautiful Bill Act (OBBBA), Congress revived a lapsed tax break that lets companies immediately deduct the cost of research and development (R&D). This was a big win, on its face, for innovation and U.S. job creation. At first glance, it has much promise: job postings for R&D should surge, tech startups are scrapping overseas hiring plans, and software engineers are hot again. So far, so good.
But here is the catch—or at least a potential catch: what happens when you juice demand for domestic tech labor without increasing the supply? What happens if, in fact, you reduce supply by constraining immigration? Ultimately, you may find yourself not accelerating innovation—but inflating labor costs.
Incentives Without Infrastructure
The new version of Section 174 lets companies fully expense R&D costs in the same year they are incurred. However, expensing is limited to domestic costs. That is a huge incentive to hire within the U.S., particularly for high cost, labor-intensive tech startups. It is also a welcome return to the pre-2017 status quo, when the Tax Cuts and Jobs Act phased in a requirement that forced companies to amortize R&D costs over five years domestically, and fifteen years abroad.
However, unlikel capital, labor is not instantly and infinitely scalable. You can't conjure a mid-career artificial intelligence engineer or a competent data scientist out of thin air. And, if you enact policies that curtail immigration, you can't call one from abroad either. As it turns out, we've made it harder, not easier, to bring in new talent—and now we've accelerated demand for the talent we do have.
A Subsidy for Scarcity
You can squint at the numbers and begin to see this shift already. Demand for U.S. based R&D roles is up 15-20% in just the past month, according to staffing firms. And some companies are now paying as much as 20-25% more to hire U.S. based engineers. The deduction, in effect, is being offset by wage inflation. The R&D shift isn't so much a tax incentive for innovation as a subsidy for talent scarcity.
While immigration might normally ease that pressure, it is hardly a footnote in today's policy playbook. On the boats and on the planes, people simply aren't coming to America. If you can't import more talent, and you can't afford the rising cost of domestic labor, your only option as a startup is to scale back.
This is the quiet paradox of modern innovation policy. We subsidize supply chains, enact tariffs by social media post and whim, fund domestic fabs, and now write off R&D wages – all in the interest of international competitiveness. But if the workforce can't scale with those policies, the policy just cannibalizes itself. Hiring slows, projects get delayed, marginal innovation doesn't happen, and companies we claim to support are left treading water in a labor-crunched economy, unable to fulfill the demand for domestic products that our ill-considered policies helped create.
Normally, labor market imbalances can also resolve themselves through expanded domestic training pipelines: STEM programs, coding bootcamps, workforce grants, and more money flowing to education. But none of that is happening—at least not at scale. Even if the current administration reverses course and makes educational initiatives a priority, they can take years to yield results.
So what happens next? If you can't import more talent, you can't train more talent, and you can't afford the rising cost of domestic labor, plans need to change. The question becomes, 'should we hire at all or wait out the current political climate and see what 2028 brings?'
The Labor Market Becomes the Bottleneck
In theory, Section 174 is pro-growth and innovation. In practice, it may just be another short-term sugar rush—juicing the labor market without adding any actual economic nutrients. We're frontloading cost savings, backloading the labor problem, and hoping that somewhere in there innovation still occurs.
There is a better way, of course: R&D expensing is good policy. But it needs to be paired with other tools, like high-skilled visa reform, targeted immigration pipelines, and sustained and predictable domestic training investments. Otherwise, we're just creating a bidding war for a small pool of engineers and calling it progress.
Turns out, tax breaks can nudge companies toward domestic hiring—they just can't conjure a developer that doesn't exist.