Benzinga
US Semiconductor and Manufacturing Tax Incentives Get Senate Support
US lawmakers, corporations and workers agreed during a Senate hearing this week that the tax code must be updated to encourage domestic production and innovation so that manufacturers are globally competitive and the nation is less dependent on imports of essential products, such as semiconductors, electric vehicle batteries, medical supplies and minerals used in electronics. Participants said last year’s shortage of personal protective equipment and semiconductors, used in everything from cars to phones and defense technologies, exposed the fragility of extended supply chains and the threat to national security of not being self-sufficient essential technologies and materials. They asked for investment tax credits and restoring deductibility for research and development to provide long-term stability and attract investment in jobs and technologies. Semiconductor self-sufficiency A severe shortage of semiconductors is the most recent example of disruptions in the supply chain, causing wide economic impact and drawing the attention of policy makers. Shortly after taking office, President Joe Biden ordered an agency-wide review of semiconductor supply chain vulnerabilities and three other areas, as well as a more in-depth review of supply chains in six key sectors. Automakers are feeling the pinch more acutely because semiconductor manufacturers are overwhelmed with orders and focusing on major electronics customers. Many automakers are paying the price for giving up some capacity allocations last year, when the COVID-19 pandemic stopped production and sales failed. But demand for automobiles has grown rapidly and, since the beginning of December, automakers have been struggling to regain the capacity that went to other sectors. It takes 45 to 60 days to make microcontrollers for automobiles, and then manufacturers must deal with shipping delays caused by crowded ocean and air carriers and severe port congestion. Production was halted at all automakers with factories in the USA. Ford Motor Co. (NYSE: F) suspended production for several weeks at plants in Louisville, Kentucky; Chicago; and Dearborn, Michigan. “The shock waves of this scam in the modern global economy continue to spread and will cause more problems in the coming weeks and months. It is a recipe for problems when a single pandemic, natural disaster or terrorist attack can break fragile supply chains and damage 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 expected to grow 5% per year until 2030. Only 12% of semiconductor manufacturing is in the United States and only 9% is from American companies. Currently, 80% of the world’s semiconductor manufacturing is concentrated in Asia, estimated the Boston Consulting Group in September. Taiwan is home to many global semiconductor producers, including Taiwan Semiconductor Manufacturing Co., the world’s largest computer chip foundry. The Law for Creating Useful Incentives to Produce Semiconductors for America (CHIPS) is one of several bipartisan legislative efforts to build the advanced manufacturing base. Senators Mark Warner, D-Virginia and John Cornyn, R-Texas, are expected to reintroduce the law, which would create a 40% refundable investment tax credit for qualified semiconductor equipment or facility expenses. It also guides the Department of Commerce to create a $ 10 billion federal program to combine state and local incentives to build a semiconductor smelter 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 would be instructed to implement a plan to use the Defense Production Act to increase domestic semiconductor production capacity. An advanced semiconductor installation costs tens of billions of dollars to build and operate, and each breakthrough in chip design requires retrofitting and reinvestment in new equipment, testified George Davis, chief financial officer at Intel Corp. (NASDAQ: INTC). He said that other countries have stable, long-term incentives that promote expansion. “In the past decade, the average chip-making rate has grown five times faster abroad than in the United States due to the robust incentive programs offered by other countries. In fact, American companies face a cost disadvantage of up to 40% 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 this trend,” he said. Jonathan Jennings, vice president of global commodity purchasing and technical assistance for the Ford supplier, warned that without an intensified national strategy in the production of lithium batteries, the United States will fall behind China in the electric vehicle market. China already controls 73% of the world’s lithium-ion battery capacity, with the US in second place, with 12%. “This is simply unacceptable. In the coming years, growth in new manufactures will be faster in Asia than in the United States, further reducing our share in global battery manufacturing,” he said. Michelle Hanlon, a management professor at the Massachusetts Institute of Technology, testified that it would be counterproductive to use a high corporate tax to offset tax credits directed at strategic industries. She argued that 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 transfer operations and profits abroad. Corporate tax is now 21% or more in line with average corporate income tax rates worldwide. The Biden administration has proposed raising the corporate income tax to 28%. R&D deductibility Industry representatives have asked Congress to stop a pending change in the tax code that would eliminate the ability to immediately deduct research costs and, instead, require that they be amortized over several years. A 2019 study by Ernst & Young found that in the first five years after amortization went into effect, research spending in the U.S. would be reduced by $ 4.1 billion annually and 23,400 R&D-related jobs would be lost. After five years, spending on R&D would fall by $ 10.1 billion. Wyden blamed Republicans for the change in R&D deductibility, saying it is the latest example of shortsighted U.S. tax policy that leaves many rules requiring repeated extensions and prevents companies from being sure and predictable that 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 tighten” corporate and individual tax cuts through the budget reconciliation process, he said. The United States spends about $ 500 billion a year on R&D, 70% of which comes from the private sector. Each $ 1 billion in research money supports about 17,000 jobs. “The CHIPS Act and the ability to continue to deduct R&D expenses allow American companies to compete on an equal footing with heavily subsidized foreign companies,” said Davis. Speakers also endorsed the American Energy Manufacturing Jobs Act of 2021, which offers a $ 8 billion increase in the advanced manufacturing tax credit available to manufacturers and other industrial users to refit, expand or build new facilities that make or recycle energy-related products. Part of the spending is directed at communities with significant job losses in coal, power plants and manufacturing. Meanwhile, Biden also proposed a 10% tax credit for companies that create jobs in the industrial sector in the United States. But it is not practical to change global supply chains, which would create higher risks and 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 investments would strengthen domestic manufacturing.” Click here for more FreightWaves / American Shipper stories by Eric Kulisch. RELATED NEWS: Biden prepares critical supply chain review Global supply chains suffocate under cargo tsunami The scarcity of semiconductors sweeps the auto industry See more from BenzingaClick here for BenzingaFedEx options negotiations to expand international air offers in the next quarter .com. Benzinga does not provide investment advice. All rights reserved.