Analysis

New Tax Credit For Chipmakers Gains Steam In Virus Bill Talks

By Alan K. Ota
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Law360 (July 7, 2020, 7:13 PM EDT) -- A bipartisan drive for a refundable investment tax credit aimed at enticing chipmakers to build more factories in the U.S. is gaining traction in Congress as a potential component of emerging pandemic response legislation.

The call for an investment tax credit for qualified semiconductor equipment comes as U.S. companies compete with rivals in China and other countries to develop 5G wireless networks. (AP)

The campaign led by Sen. John Cornyn, R-Texas, a senior member of the Senate Finance Committee, and a bipartisan coalition of lawmakers in both chambers has been trying to build support for a proposal to create a new refundable investment tax credit to spur domestic semiconductor manufacturing.

Cornyn said the new incentive would provide support to U.S. technology companies as they compete with rivals in China and other countries on key projects such as the development of 5G wireless networks.

"They need some incentives to level the playing field," Cornyn, a former Senate majority whip, told Law360.

Lawmakers in both parties say S. 3933, legislation introduced by Cornyn last month known as the Creating Helpful Incentives to Produce Semiconductors for America Act, could be a model for other measures aimed at ensuring there are domestic suppliers of products needed to combat the coronavirus, such as medical supplies, and of semiconductors and other components for the technology industry.

The CHIPS Act would create a 40% refundable investment tax credit for qualified semiconductor equipment and manufacturing facility expenditures through 2024, followed by reduced tax credit rates of 30% and 20%, respectively, in 2025 and 2026.

Cornyn said he hoped to move parts of the bill — such as federal grants to help state and local governments cover the cost of certain incentives and support for advanced semiconductor research and manufacturing — in S. 4049, the defense authorization bill. He said he would look to advance the refundable tax incentive in the next legislative package aimed at countering the economic effects of the novel coronavirus, which causes the respiratory disease COVID-19.

Sen. Mark Warner, D-Va., a senior tax writer and ranking member on the Senate Intelligence Committee, said the tax credit and other parts of Cornyn's plan would help U.S. technology companies retain their role as leaders in the global marketplace.

"We can't presume we're going to maintain this lead without this kind of support," Warner told Law360. 

Senate Finance Chairman Chuck Grassley, R-Iowa, voiced general support for Cornyn's proposal and said he had waived his committee's jurisdiction over the CHIPS Act proposal to allow parts of the legislation to be considered as a potential amendment to the Senate defense bill. But the top Senate tax writer also told Law360 that no decision has been made on whether to advance the proposed refundable tax credit as he helps to develop the Senate GOP alternative to Democratic relief measures in the House-passed $3 trillion Health and Economic Recovery Omnibus Emergency Solutions Act, or Heroes Act.

Both parties are trying to agree on several tax incentives for businesses and families to include in pandemic response legislation before the July 31 expiration of expanded jobless aid in the Coronavirus Aid, Relief and Economic Security Act.

Cornyn and Warner said the CHIPS Act was intended to promote development of new chip factories, both by U.S.-based companies and foreign-based companies with U.S. subsidiaries such as Taiwan Semiconductor Manufacturing Co., which announced in May it planned to build a $12 billion chip fabrication plant in Arizona. Some supporters say domestic factories are needed because there is a danger that global supply lines for delivering semiconductors could be disrupted by future pandemics or trade disputes.

The proposal has been backed by advocates for chipmakers and other businesses. Keith Jackson, chairman of the Semiconductor Industry Association and president, CEO and director of Arizona-based ON Semiconductor, said the bill could help the U.S. expand its current 12% share of global semiconductor manufacturing capacity and "remain the world leader in chip technology."

In an email to Law360, a Taiwan Semiconductor spokesman praised the CHIPS Act as an example of public policies that would be crucial to the success of the company's $12 billion plant in Arizona. It would "give us the confidence this and other future investments by TSMC and its supply chain companies will be successful," the spokesman said.

In the House, Ways and Means Chairman Richard Neal, D-Mass., said he remained open to business tax incentives aimed at promoting domestic manufacturing as he tries to rally support for infrastructure financing and several relief measures contained in the Heroes Act. But Neal has not taken a position on the proposal for a refundable tax credit for chipmakers.

Reps. Doris Matsui, D-Calif., and Michael McCaul, R-Texas, co-chairs of the bipartisan High Tech Caucus, said they were working together to try to advance parts of the House version of the CHIPS Act in the defense authorization bill and to move the proposed tax credit in other legislation.

"It's a very bipartisan proposal. Both sides want more manufacturing jobs in the United States," McCaul, ranking member on the House Foreign Affairs Committee, told Law360.

Rep. Kevin Brady, R-Texas, ranking member on Neal's panel, said the refundable tax credit for chipmakers was one of several proposals he is weighing to encourage companies to onshore — or bring to the U.S. — the production of essential products and components needed to deal with the pandemic and bolster key industrial sectors.

"We're very interested," Brady told Law360, referring to the refundable tax credit in the CHIPS Act.

Brady said he was working with other lawmakers on "creating the right set of incentives to onshore crucial medicines and medical supplies, and from a technology standpoint some of those key elements."

In addition to the tax credit for semiconductor makers, he said he was continuing to explore the idea of offering a reduction in the 21% corporate income tax rate set in the 2017 tax overhaul as a reward to companies that shift from offshore to domestic production of certain products.

Some Democrats have voiced concerns that creating refundable business tax incentives would divert resources away from similar incentives for families, such as proposals in the Heroes Act to create a temporary expanded version of the refundable child tax credit and the refundable earned income tax credit for workers without children.

Rep. Lloyd Doggett, D-Texas, a senior member of the Ways and Means Committee, said he remained skeptical of proposals aimed at "giving refundable tax credits to corporations." But Doggett took a neutral stance on the CHIPS Act and said he believed the nation needed to do more to "build up our semiconductor capacity in the United States."

While some lawmakers remain undecided, Matsui said she believed the proposal to encourage domestic semiconductor manufacturing could draw strong support from lawmakers in both parties.

"We really ought to be able to have some control over some of these products," Matsui told Law360.

--Editing by Tim Ruel and Neil Cohen.

For a reprint of this article, please contact reprints@law360.com.

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