States Enact Semiconductor Subsidies in the Wake of CHIPS – Tax Foundation
Federal policymakers enacted the CHIPS and Science Act last year to provide $280 billion of incentives for domestic semiconductor investment and research and development (R&D). Unfortunately, the many drawbacks of the industrial policy approach have not deterred U.S. states from hopping on the bandwagon themselves. To date, at least 12 states have followed suit by enacting new or expanding existing 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. incentives and funding programs for the semiconductor industry.
The CHIPS Act was intended to strengthen U.S. manufacturing and national security by encouraging the production of cutting-edge semiconductor technology in the United States, not China. At the federal level, national security concerns are certainly justified—but that does not mean the CHIPS Act industrial policy approach is warranted. Nor does that justification extend to states.
At the federal level, the CHIPS Act incentives consist of $200 billion for scientific R&D and commercialization, $39 billion for semiconductor manufacturing, $13 billion for semiconductor R&D and workforce development, $24 billion for a 25 percent investment 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. for qualifying facilities and equipment, and the remainder for other initiatives. National security arguments aside, providing billions of dollars of incentives for semiconductor investment is not a guarantee to actually get billions of dollars of semiconductor investment—nor is it a guarantee that the investment that does occur will be productive.
And when it comes to state-level incentives in particular, as our colleague has written in the past, incentives also have the very real effect of privileging some taxpayers over others. Qualifying firms engaging in qualifying activities benefit, while nonfavored businesses and activities are subject to the full extent of the tax code, picking up the tab.
At least 12 states have recently enacted new tax incentives, expanded existing tax incentives, or provided new economic development funding for semiconductor investments. The states include Arizona, California, Colorado, Florida, Idaho, Illinois, Kansas, New York, Ohio, Oregon, Pennsylvania, and Texas.
Ohio enacted legislation that creates a pathway for a semiconductor manufacturing facility in the state to qualify as a “megaproject.” In turn, this would allow its owners and suppliers to benefit from significant tax incentives that include specific exemptions to the state’s sales, use, and property taxes, and exclusions to the commercial activity tax. These incentives, however, are subject to clawback.
Beginning in tax year 2024, Oregon will offer an R&D tax credit for “qualified semiconductor companies” that will be determined in accordance with Section 41 of the Internal Revenue Code. Depending on the number of employees, the credit may be refundable or carried forward if any portion remains unused. The maximum credit allowed is $4 million per taxpayer and there are yearly caps to the amount of credits offered. Oregon has not had an R&D tax credit since 2017, and the new incentive is scheduled to sunset in 2030.
Illinois has the Manufacturing Illinois Chips for Real Opportunity (MICRO) Act through which semiconductor and microchip manufacturers may be eligible for a variety of incentives. These include tax credits for investment and job creation and retention. Similarly, through HB23-1260, Colorado created the CHIPS Refundable Tax Credits Program, designed to assist Colorado-based companies in securing federal funding under the CHIPS and Science Act. Beginning in 2023, Pennsylvania has added a tax credit specific to semiconductor and biomedical manufacturing and research.
Not to be outdone by the others, New York, through Green CHIPS legislation, now includes energy-efficient semiconductor manufacturers in the state’s existing Excelsior Jobs Credit program. In total, New York approved $10 billion worth of incentives and has pledged $5.5 billion for a $100 billion memory chip manufacturing complex. And California, for its part, has approved over $40 million in incentives to two semiconductor companies through the California Competes Tax Credit program.
We should also note that many states already maintain existing business incentives such as job or investment tax credits, empowerment zones, or other grant programs. Some programs were in place well before the federal CHIPS legislation, while others were recently enacted in anticipation of the federal programs. For example, Alabama recently extended its incentives through the Alabama Jobs Act, which provides up to $350 million in tax credits for capital investment and payroll rebates for job creation. Unless specifically prohibited, the incentives could also apply to semiconductor businesses. Kansas, under its Attracting Powerful Economic Expansion program, has pledged more than $300 million of incentives for a $1.8 billion semiconductor plant, while New Mexico, after reforms in 2021 to a local economic development program, provided $14 million in tax rebates plus additional funding for semiconductor investment in 2021.
As with the federal legislation, there is no guarantee that states will see their semiconductor incentives bear fruit. For instance, many of the provisions are temporary. For some manufacturers, the expiration of an incentive could mean higher taxes in the future and could serve as a disincentive to invest in the state in the first place. For other semiconductor manufacturers, the incentives may be just the boost they need to begin or continue operations in a certain location—though past experience casts doubt on the ability of incentives to deliver. Nevertheless, a narrowly targeted tax incentive distorts business decisions and is not the best use of limited state government funds that could instead be used for broad, pro-growth improvements to the overall tax system.
Policymakers at all levels of government should avoid the pitfalls of incentives. Instead, they should focus on creating a more efficient, neutral, and structurally sound tax code to the benefit of all types of business investment.
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