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Post: Outside the Box: Congress’s $76 billion plan to help U.S. chip makers is bad tax policy — and could turn into subsidies forever

Both the Senate and the House of Representatives have approved $52 billion in grants and $24 billion in tax credits that advocates say will strengthen the production of semiconductors in the U.S. while increasing national security.

Now U.S. semiconductors

could join wool, mohair, helium, soybeans, ethanol, steel and credit unions as industries thought to be so important as to warrant taxpayer subsidies—forever.

True, the CHIPS and Science Act would provide these subsidies only through 2027, but you can count on the Washington apparatus to continuously push for another round of grants and tax credits until it becomes permanent.

A better path, as outlined in a recent Tax Foundation study, is to fix the bias against capital investment in the tax code. Lawmakers could do that by letting businesses write off the cost of their capital investments, including equipment, structures, and research and development in the year in which the purchases are made. These measures allow all industries to thrive, not just the politically connected.

This is especially true of semiconductors, an industry that changes as fast as Moore’s Law, which basically says that the speed and capacity of computer chips tend to double every two years.

Rather than create a federal “chip” bureaucracy and a special interest group dependent on subsidies, Congress would do better to broadly reduce the tax cost of research and development and of building factories, which can cost tens of billions of dollars.

Unfortunately, Congress’s propensity is to target help to specific industries rather than enact policies that improve the overall investment climate in the U.S.

At the same time as Congress is considering taxpayer subsidies for the semiconductor industry, it allowed a tax provision that lowers the tax cost of R&D for all companies to expire at the start of this year. Normally, companies can write off the cost of R&D expenses in the year they make the investment. But starting this year, the 2017 Tax Cuts and Jobs Act requires firms to deduct those costs over many years, which effectively raises their taxes and the cost of R&D.

A recent Tax Foundation study reports that no other developed country requires companies to spread R&D deductions over multiple years. Indeed, “China allows R&D expenses to be immediately deducted and provides additional ‘super deductions’ to encourage R&D investment.”

If we are going to compete with China, we need to 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 the machines that make computer chips. However, in 2023, the benefits of those write-offs will begin to phase out, making those investments more expensive and less attractive in the U.S.

Making these provisions permanent will give all companies, not just a select few, confidence to invest in the future. It is easier for an industry to rely on a sound, pro-growth tax code rather than on continuously expiring tax carveouts.

U.S. tax law is even less kind to major investments, such as factories and buildings. The cost of those investments must be written off over 39 years rather than in the year the investment is made. In an era of 9% inflation, such deductions are worth less every year. By contrast, China allows factories to be expensed over 20 years, and many firms pay a lower corporate tax rate than do U.S. companies.

Tax Foundation economists estimate that the average tax cost of new investments of factories in China is 4.8%. In the U.S., the tax cost of such an investment is 18.3%. Throwing billions into taxpayer subsidies and U.S. firms won’t change that disparity.

Ironically, the U.S. tax code allows companies to write off the wages they pay their workers, but not the buildings those workers work in every day.

Unfortunately, Congress’s propensity is to target help to specific industries rather than enact policies that improve the overall investment climate in the U.S. Today it’s the chip industry. Past Congresses obsessed over steel. During the height of the COVID-19 crisis, lawmakers strove to onshore the production of medical supplies and personal protective equipment (PPE).

In times of crisis, the intent behind such policies is laudable. But targeting benefits to one industry not only violates the basic principles of sound tax policy, it’s also short-sighted. What is good policy for medical manufacturing should also be good policy for semiconductors, automobiles, steel and every other industry that might one day be critical. 

The federal budget is comprised of sedimentary layers of programs, often well-intended, that were created to solve a national crisis or emergency. Sadly for taxpayers, the programs also create special interests who organize to protect these programs and subsidies long after the crisis has passed. Lawmakers should embrace these historical lessons and not deposit subsidies for semiconductors atop these alluvial layers of budgetary largess. Good tax policy can benefit all industries equally.

Scott Hodge is president emeritus and senior policy advisor at the Tax Foundation, a nonprofit research organization in Washington, D.C. Follow him on Twitter @scottahodge.

Now read: Intel’s choice of Ohio for its $20 billion factory shows what matters at least as much as low taxes — and it costs money

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