Want the U.S. to be tops in computer chips? Ditch the subsides and fix the tax code
The Senate approved, with bipartisan support, a measure that would give tax subsidies to semiconductor firms that build new manufacturing plants in the U.S. The moved was touted as bringing good jobs back home, spur U.S. tech activity, and increase national security.
Except it might not do any of that at all, thanks to other parts of the tax code that undermine the Senate’s generosity. According to the Tax Foundation’s Erica York:
Semiconductor manufacturing facilities, called “foundries,” and the related manufacturing equipment are extremely expensive to build. For example, Samsung is considering a $17 billion foundry in Austin, Texas, and the Taiwan Semiconductor Manufacturing Company is constructing an almost $20 billion foundry in southern Taiwan. The bill text itself emphasizes that a building and its structural components are “an integral part of a semiconductor manufacturing facility.”
Under current law, investment in industrial factories, such as a semiconductor foundry, cannot be deducted immediately but instead must be deducted over a 39-year period. The tax treatment of short-lived assets, such as some of the machinery and equipment that would go inside a foundry, is currently eligible for 100 percent bonus depreciation. That provision allows full write-offs in the year an asset is placed in service, but it will begin phasing out in 2023. Research and development expenses, also crucial to the semiconductor industry, are currently eligible for full expensing, but beginning next year will instead be amortized over five years.
The bottom line – if government really wants to help make the U.S. tops in chip manufacturing, ditch the tax subsidies, and fix the tax code:
By denying full and immediate deductions for investments, the tax code increases the cost of making such investments in the first place. Removing the tax code’s bias against making a domestic investment of any sort should be prioritized above exploring industry-specific tax subsidies.
Which is good public policy. And because it’s good policy, the political class will avoid doing it in favor of something big, expensive, and counter-productive.