The Senate and House of Representatives have approved $52 billion in grants and $24 billion in tax credits that supporters say will bolster U.S. semiconductor production while bolstering national security.
Now American SOX Semiconductors,
could join wool, mohair, helium, soy, ethanol, steel and credit unions as industries deemed so important they warrant taxpayer subsidies – forever.
Granted, the CHIPS and Science Act would only provide these grants until 2027, but you can count on the Washington apparatus to keep pushing for another round of grants and tax credits until it becomes permanent.
A better way, as noted in a recent Tax Foundation Study, is to correct the bias against capital investment in the tax code. Lawmakers could do this by allowing companies to write off the cost of their capital investments, including equipment, structures, and research and development in the year the purchases are made. These measures allow all industries to thrive, not just the politically connected ones.
This is especially true for semiconductors, an industry that is changing as rapidly as Moore’s Law, which basically says that the speed and capacity of computer chips tends to double every two years.
Rather than creating a “chip” federal bureaucracy and a grant-dependent special interest group, Congress would be better off greatly reducing the fiscal cost of research and development and building factories, which can cost dozens billions of dollars.
“ Unfortunately, the propensity of Congress is to target aid to specific industries rather than enacting policies that improve the overall investment climate in the United States. ”
As Congress considered giving taxpayer subsidies for the semiconductor industry, it authorized the expiration early this year of a tax provision that lowers the tax cost of R&D for all businesses. Normally, companies can write off the cost of R&D expenses in the year they make the investment. But starting this year, the Tax Cuts and Jobs Act 2017 requires companies to deduct these costs over many years, effectively increasing their taxes and the cost of R&D.
A recent study by the Tax Foundation reports that no other developed country obliges companies to spread R&D deductions over several years. Indeed, “China allows immediate deduction of R&D expenses and provides additional ‘super deductions’ to encourage R&D investment”.
If we want to compete with China, we must have a more competitive tax system than theirs. This bill is a step in the wrong direction.
Similarly, the 2017 tax law allowed companies to write off purchases of equipment and machinery, such as machines that make computer chips. However, in 2023, the benefits of these write-offs will begin to disappear, making these investments more expensive and less attractive in the United States.
Making these arrangements permanent will give all businesses, not just a select few, the confidence to invest in the future. It is easier for an industry to rely on a healthy, growth-friendly tax code rather than tax exemptions that continually expire.
US tax law is even less favorable to major investments, such as factories and buildings. The cost of these investments must be amortized over 39 years rather than in the year the investment is made. In an age of 9% inflation, these deductions are worth less each year. In contrast, China allows factory spending for 20 years, and many companies pay a lower corporate tax rate than US companies.
Tax Foundation economists estimate that the average tax cost of new factory investment in China is 4.8%. In the United States, the tax cost of such an investment is 18.3%. Throwing billions into subsidies from American taxpayers and corporations will not change this disparity.
Ironically, the US tax code allows companies to deduct the wages they pay their workers, but not the buildings in which those workers work on a daily basis.
Unfortunately, the propensity of Congress is to target aid to specific industries rather than enacting policies that improve the overall investment climate in the United States. Today is the chip industry. Past Congresses obsessed with steel. At the height of the COVID-19 crisis, lawmakers scrambled to outsource the production of medical supplies and personal protective equipment (PPE).
In times of crisis, the intention behind such policies is laudable. But targeting the benefits to a single industry not only violates basic tenets of sound fiscal policy, it’s also short-sighted. What is good policy for medical manufacturing should also be good policy for semiconductors, automobiles, steel, and all other industries that may one day be critical.
The federal budget is made up of sedimentary layers of often well-meaning programs that were created to address a national crisis or emergency. Unfortunately for taxpayers, the programs also create special interests that organize to protect these programs and subsidies long after the crisis is over. Lawmakers should heed these historical lessons and not lay down semiconductor subsidies on these alluvial layers of fiscal largesse. Good tax policy can benefit all industries equally.
Scott Hodge is Chairman Emeritus and Senior Policy Advisor at the Tax Foundation, a nonprofit research organization in Washington, D.C. Follow him on Twitter @scottahodge.
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