Boost Semiconductor Manufacturing by Removing Tax Barriers—Not Creating Tax Subsidies

June 18, 2021

A bipartisan group of Senators introduced the Facilitating American-Built Semiconductors (FABS) Act this week to create a permanent 25 percent investment tax credit for investments in semiconductor manufacturing equipment and construction of related facilities—but their proposal would not address underlying bias against investment that exists in the tax code today. Rather than provide industry-specific tax subsidies, lawmakers should make sure the basic structure of the tax code is not tilted against domestic investment generally.

The FABS Act would provide firms a tax credit (or a direct payment) equal to 25 percent of their qualified investment in semiconductor manufacturing facilities and property, reducing a firm’s tax liability and decreasing the after-tax cost of making such investments. However, the bill would leave the current depreciation system unchanged, meaning businesses would have to deduct the costs of building new facilities over extended periods, a delay that diminishes the real value of the deductions due to inflation and the time value of money.

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.

If a business builds a foundry, it would not be able to fully deduct the cost of its investment, increasing the after-tax cost of the project. In 2021, structures such as industrial factories face a marginal effective tax rate of 21 percent, compared to 7.5 percent for equipment. By 2030, the rates will rise to 25.6 percent and 23.7 percent, under current law.

Attracting investment to the United States should start with neutral tax treatment, including full and immediate deductions for capital investment, not subsidies. 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.

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Full 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.

Depreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment.

A 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.