Semiconductor chip shortages in the United States are leading to disruptions in everything from car production to cellphones. Congress has now addressed this shortage of semiconductor chips by creating a subsidy program for semiconductor investment in the U.S. This well-meaning policy contains a major flaw. By requiring state and local governments to co-fund these subsidies, it encourages companies to squeeze governments for as many tax dollars as possible. This program could be an expensive misstep, setting back industrial policy and harming local communities.
This potential for harm is apparent in new proposed legislation, the awkwardly named Creating Helpful Incentives for Producing Semiconductors (CHIPS) for America and Foundries Act, that aims to address a global shortage of semiconductor chips, encouraging investment in the U.S. for semiconductor production. What’s not to like?
For one, this policy could inadvertently harm U.S. competitiveness by encouraging multinational corporations to extract money from local governments, including taking tax revenue away from cities, counties and our local schools. To receive federal funding, companies must receive state or local tax dollars.
This program hasn’t even been funded yet, but semiconductor companies are already announcing investments in the U.S. For example, semiconductor company Intel received almost $2 billion in state and local incentives for a proposed plant in Ohio. New York passed a bill providing up to $10 billion motivated by negotiations with an unnamed semiconductor company. In Austin, South Korean semiconductor maker Samsung announced a $17 billion investment in the area.
A quick glance into the Samsung deal reveals the complex link with the U.S. CHIPS Act. Samsung isn’t new to Austin. It has been producing chips in the area since 1997. The facility has received decades of taxpayer-funded subsidies by the state, city, county, and local school district. Further expanding this site seemed like the most likely option for a new $17 billion investment.
To the surprise of many, Samsung negotiated with two different central Texas area school districts, Manor ISD and Taylor ISD, for tax breaks. It also pitted local governments against each other for unprecedented grants and tax incentives, with surprising aggressiveness. Why would Samsung push even harder for even more lucrative incentives after decades in Austin and play two local governments against each other?
To unlock federal dollars from the CHIPS Act, a company must receive incentives from local and state governments. The more successful they are in getting state and local governments to open up their (your) wallet, the more the federal government will give. Negotiating $50 million from state and local governments gives companies matching funds from U.S. taxpayers. Or in the case of Samsung, it extracts $954 million from Texans.
Meanwhile, Intel in Ohio received almost $2 billion. It becomes hard to deny, then, that the federal government is encouraging “chip wars” across states and specific metro areas.
In the past, politicians proposed solutions to this subsidy overuse and to rein in the use of incentives at the state and local levels. The Kansas City area, long considered the poster child for wasteful use of incentives, came to an agreement between the states of Kansas and Missouri to stop paying companies to relocate a few miles across the border. Other state legislatures have proposed “state compacts” limiting company poaching. One paper even considered the possibility of the federal government offering small grants to states that ended expensive subsidy programs.
Well-meaning policy ideas such as encouraging semiconductor research, development and manufacturing require care in policy design and implementation. Industrial policy isn’t meant to simply benefit an industry. It should be designed to strengthen communities that house these industries.
Federal policies should at the very least be neutral about the use of state and local incentives, and not require companies to extract local dollars in exchange for federal money. Even better would be a rule requiring federal incentive recipients of CHIPS funding to not seek state and local incentives. Industrial policy should be designed to help Americans, not empower companies to extract money from local communities.
Nathan M. Jensen is a professor of government at The University of Texas at Austin, a senior fellow at the Niskanen Center, and a co-author of “Incentives to Pander: How Politicians Use Corporate Welfare for Political Gain.”