By: Gregory Arcuri
Introduced in June of 2021 by a bipartisan group of senators, the “
Facilitating American-Built Semiconductors (FABS) Act” aims to provide tax-based incentives towards the construction, expansion, or modernization of semiconductor fabrication plants (or ‘fabs’) and processing equipment in the United States.
FABS offers private firms a 25% tax credit towards the purchase, construction, manufacture, or utilization of a semiconductor manufacturing facility or related equipment that will be used for the design or processing of chips. Before the facility or equipment is placed into service, firms or organizations can elect to receive the tax credit as a direct payment.
CHIPS versus FABS
Meanwhile, Congress is also considering
the CHIPS for America Act, which provides financial assistance of up to $3 billion (out of a pool of $39 billion) for private firms, public institutions, or consortia to construct semiconductor fabs.
While FABS offers tax credits, the CHIPS Act’s incentives come in the form of grant subsidies specifically for the construction of foundries within the United States. CHIPS also includes provisions that require recipient firms to invest in community and workforce development initiatives to ensure that their project benefits the surrounding municipality or region. CHIPS further authorizes the creation of several federal R&D, supply chain, and strategic initiatives meant to renew American competitiveness in chip manufacture, processing, packaging, and design.
Navigating Congress
Amidst an intensifying competition with the People’s Republic of China, ensuring U.S. economic competitiveness and dominance in semiconductors and other critical technologies has been at the top of Congress’ legislative agenda. Specifically, policymakers want to make certain that the United States maintains a robust manufacturing base in strategic industries, protecting high-priority supply chains in the event of international conflict or unforeseen crises like the COVID-19 pandemic.
Reflecting the bipartisan interest in this issue, Senators Ron Wyden (D-OR), Mike Crapo (R-ID), John Cornyn (R-TX), Debbie Stabenow (D-MI), Steve Daines (R-MT), Mark Kelly (D-AZ), and Thom Tillis (R-NC) introduced the FABS Act in June 2021.
FABS was introduced just after the Senate passed the U.S. Innovation and Competition Act (USICA). USICA included funds for the CHIPS for America Act programs and demonstrated that momentum for semiconductor-related legislation was strong.
However, after FABS stalled in the Senate Finance Committee, its original sponsors lobbied for its inclusion as an “Advanced Manufacturing Investment Credit (AMIC)” under §48E of
Build Back Better Act (BBB).
The AMIC retained key components of the FABS Act, namely its tax incentives for both the construction of ‘fabs’
and for chip processing and manufacturing equipment. The primary difference between the FABS Act and the AMIC is how firms qualify for the tax credit. In the AMIC, firms automatically qualify for a 5% base credit but must meet certain wage and apprenticeship requirements to qualify for the full 25% credit stipulated in the original FABS Act. However, BBB – a signature initiative of President Biden – and, therefore, the AMIC failed to pass the Senate, in the face of broad Republican opposition, and dissent from key Senate Democrats.
The Role of State Subsidies
Support proposed in the FABS and CHIPS Acts needs to be viewed in the context of national and regional support for the semiconductor industry.
Chip makers in Taiwan, South Korea, and Japan already enjoy significant government subsidies towards their operations. According to Deborah Wince-Smith with the Council on Competitiveness, building a new fab in the United States is
30% to 50% more expensive for firms than building one in East Asia, primarily because the U.S. lacks dedicated federal incentives for semiconductor plant construction.
However, several corporations have recently announced plans to construct fabs in the United States over the next several years, drawing on state and local level incentives and perhaps also the expectation of federal financial assistance. Following an offer of over $1 billion worth of combined state subsidies and tax credits from the state of Ohio, Intel announced in January 2022 that it would
break ground on a $20 billion fab in New Albany, OH. This semiconductor operation could become the largest on Earth if completed. Likewise, Taiwan Semiconductor Manufacturing Co. – the world’s largest contract manufacturer of semiconductors – committed $12 billion towards the construction of a new semiconductor campus in Phoenix, Arizona, after the city agreed to spend
over $200 million on related infrastructure like roads and wastewater improvements.
Choice of Instruments
As lawmakers race to augment U.S. self-reliance in semiconductor manufacturing, there is a need to better understand the characteristics and impacts of tax credits versus direct subsides – advanced through FABS and CHIPS – as alternative or complimentary mechanisms to support the renewal of the nation’s infrastructure for semiconductor production.
Gregory Arcuri is a research intern with the Renewing American Innovation Project at the Center for Strategic and International Studies in Washington, DC.
The Perspectives on Innovation Blog is produced by the Renewing American Innovation Project at the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
