U.S. lawmakers, corporations and labor agreed during a Senate hearing this week that the tax code should be updated to incentivize domestic production and innovation so manufacturers are globally competitive and the nation is less dependent on imports for critical products, such as semiconductors, electric vehicle batteries, medical supplies and minerals used in electronics.
Participants said shortages in the past year of personal protective equipment and semiconductors, used in everything from cars to phones to defense technologies, exposed the fragility of extended supply chains and the threat to national security from not being self-reliant in critical technologies and materials.
They called for investment tax credits and restoring deductibility for research and development to provide long-term stability and attract investment in jobs and technologies.
A severe semiconductor shortage is the latest example of supply chain disruptions causing widespread economic impact and drawing the attention of policymakers. Soon after taking office, President Joe Biden ordered an agencywide review of supply chain vulnerabilities in semiconductors and three other areas, as well as a more in-depth review of supply chains in six key sectors.
Automakers are most acutely feeling the pinch because semiconductor makers are overwhelmed with orders and focusing on top customers in electronics. Many car companies are paying the price for relinquishing some capacity allocations last year when the COVID-19 pandemic shut down production and sales cratered. But demand for autos quickly surged and since early December automakers have struggled to recover capacity that went to other sectors. It takes 45 to 60 days to make the microcontrollers for autos, and then manufacturers must navigate transportation delays caused by crowded ocean and air carriers and severe port congestion. Production has been interrupted at every automaker with U.S. plants. Ford Motor Co. (NYSE: F) has suspended production for several weeks at plants in Louisville, Kentucky; Chicago; and Dearborn, Michigan.
“The shockwaves of this blow to the modern global economy are continuing to ripple out and will cause further problems in the weeks and months to come. It is a recipe for trouble when one single pandemic, natural disaster or terrorist attack can sever brittle supply chains and hobble our economy, threaten American jobs, and weaken our national security,” said Finance Committee Chairman Ron Wyden, D-Oregon.
Global demand for semiconductors has increased dramatically and is projected to grow 5% annually until 2030. Only 12% of semiconductor manufacturing is in the U.S. and just 9% is from American companies. Currently, 80% of the world’s semiconductor manufacturing is concentrated in Asia, Boston Consulting Group estimated in September.
Taiwan is home to many global semiconductor producers, including Taiwan Semiconductor Manufacturing Co., the largest foundry in the world for computer chips.
The Creating Helpful Incentives to Produce Semiconductors for America (CHIPS) Act is one of several bipartisan legislative efforts to build up the advanced manufacturing base. Sens. Mark Warner, D-Virginia, and John Cornyn, R-Texas, are expected to reintroduce the bill, which would create a 40% refundable investment tax credit for qualified semiconductor equipment or facility expenditure.
It also directs the Commerce Department to create a $10 billion federal program to match state and local incentives for building a semiconductor foundry and to assess the ability of the U.S. industrial base to support national defense. The Department of Defense would be authorized to increase activities related to semiconductor technologies and directed to implement a plan for utilizing the Defense Production Act to enhance domestic semiconductor production capability.
An advanced semiconductor facility costs tens of billions of dollars to build and operate, and every advancement in chip design requires retooling and reinvestment in new equipment, George Davis, Intel Corp.’s (NASDAQ: INTC) chief financial officer, testified. He said other countries have stable, long-term incentives that promote expansion.
“Over the last decade, the average rate of chip manufacturing has grown five times faster overseas than in the U.S. due to robust incentive programs offered by other countries. In fact, U.S. companies face up to a 40% cost disadvantage compared to Asian competitors due largely to government incentives,” he said, noting that 19 European Union countries recently agreed to jointly invest up to $60 billion in semiconductor technologies. “It would be great to have a sustainable strategy to reverse that trend,” he said.
Jonathan Jennings, vice president of global commodity purchasing and supplier technical assistance at Ford, warned that without a stepped-up national strategy on lithium battery production, the U.S. will fall behind China in the electric vehicle market. China already controls 73% of worldwide capacity for lithium-ion batteries, with the U.S. in second place at 12%. “This is simply unacceptable. Over the next few years, the growth in new manufacturing will be faster in Asia than in the U.S., further reducing our share of global battery manufacturing,” he said.
Michelle Hanlon, professor of management at the Massachusetts Institute of Technology, testified that using a high corporate tax to offset targeted tax credits for strategic industries would be counterproductive. She argued the corporate income tax is inefficient because it discourages job creation and investment. The U.S. had one of the highest corporate income tax rates in the developed world, 35%, until the 2017 tax cuts, which motivated many companies to move operations and profits offshore. The corporate tax is now 21% and more in line with average corporate income tax rates around the world.
The Biden administration has proposed raising the corporate income tax to 28%.
Industry representatives called on Congress to stop a pending change to the tax code that would eliminate the ability to immediately deduct research costs and instead require they be amortized over several years. A 2019 study by Ernst & Young found that in the first five years after amortization takes effect, U.S. research spending would be reduced by $4.1 billion annually and 23,400 R&D-related jobs would be lost. After five years, R&D spending would drop $10.1 billion.
Wyden blamed Republicans for the change in R&D deductibility, saying it is the latest example of short-sighted U.S. tax policy that leaves many rules requiring repeated extensions and prevents companies from having the certainty and predictability they need to plan investments. Republicans made “bizarre decisions” in 2017 to put incentives for research and innovation “on the chopping block so they could squeeze” massive corporate and individual tax cuts through the budget reconciliation process, he said.
The U.S. spends about $500 billion a year on R&D, 70% of which comes from the private sector. Every $1 billion in research money supports about 17,000 jobs.
“The CHIPS Act, and the ability to continue to deduct R&D expenditures, enable American companies to compete on equal footing with heavily subsidized foreign companies,” Davis said.
Speakers also endorsed the American Jobs in Energy Manufacturing Act of 2021, which offers an $8 billion increase to the advanced manufacturing tax credit available to manufacturers and other industrial users to retool, expand or build new facilities that make or recycle energy-related products. A portion of the spending is targeted for communities with significant job losses in coal, power plants and manufacturing.
Meanwhile, Biden has also proposed a 10% advanceable tax credit for companies creating U.S. manufacturing jobs. But it’s not practical to upend global supply chains, which would create risks and higher costs for end-users, said National Manufacturers Association President Jay Timmons. He argued that “a focus on making the United States the destination of choice for new industrial investment would strengthen domestic manufacturing.”