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Chips Are Down in Semiconductor Tax World

3 min readBy: Scott Hodge

On Wednesday, the Senate passed the so-called Chips bill (The CHIPS and Science Act of 2022), which would provide $52 billion in grants and $24 billion in tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s to supposedly strengthen the production of semiconductors in the U.S. If this measure passes the House, U.S. semiconductors will join wool, mohair, helium, soybeans, ethanol, steel, credit unions, and Amtrak as industries thought to be so important as to warrant taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. payer subsidies—forever.

As President Ronald Reagan once observed, “The closest thing to immortality is a government program.” So, lawmakers should think ahead 50 years from now and wonder if those in Congress might ask, “What were they thinking?”

This is especially true of 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. When wool and mohair were key to making World War II flight jackets, electronics were powered by vacuum tubes. Imagine if Congress had decided then that having a strong U.S. vacuum tube industry was key to national security and, thus, deserving of taxpayer subsidies. Would the industry have invented transistors, which eventually led to the invention of semiconductors?

Perhaps not. Although when synthetic materials replaced wool and mohair in flight jackets the subsidies to those farmers continued for decades. In other words, most likely we would still have a taxpayer-subsidized vacuum tube industry despite the creation of computer chips.

In his book The Logic of Collective Action, the great economist Mancur Olson taught us that the reason such programs metastasize in the federal budget is because the special interests who benefit from these subsidies are louder and more organized than the citizens whose tax dollars go to fund them.

For example, there are roughly 150 million taxpayers. So, the Chips bill’s $76 billion in total subsidies for the semiconductor industry amounts to roughly $500 per taxpayer. Which interest group is willing to organize and fight harder for their stake in the Chips bill?

Olson’s theory of interest groups has kept each of these industries on the taxpayer gravy train for decades, often with unintended consequences. Ethanol subsidies pit our cornflakes against our cars. Large credit unions don’t pay income taxes yet compete directly with taxpaying banks. The U.S. steel industry has been protected by various tariffTariffs are taxes imposed by one country on goods or services imported from another country. Tariffs are trade barriers that raise prices and reduce available quantities of goods and services for U.S. businesses and consumers. s and trade restrictions for six decades, yet it continues to shrink every year. Amtrak was created in 1971 by merging 20 largely bankrupt private passenger railroads and still relies heavily on taxpayer subsidies. It has taken the federal government decades to sell off the national helium reserves, which began while zeppelins ruled the sky.

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, special interests 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.

A better path, as outlined in a recent Tax Foundation study “Taxes, Tariffs, and Industrial Policy: How the U.S. Tax Code Fails Manufacturing”: “Fixing the bias against capital investment is preferable to pursuing industrial policy through the tax code, as subsidies tend to be ineffective and tariffs often weaken protected domestic industries and harm downstream industries.”

The solution, the study concludes, is to move to full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. for all capital investment, including equipment, structures, and research and development. These measures allow all industries to thrive, not just the politically connected.

Note: Originally published on July 21st, this post has been updated on July 27, 2022 to reflect recent policy developments.