U.S. Congress Approves CHIPS to Boost Semiconductor Production

The CHIP Act will give financing for the research and manufacturing of semiconductors totaling $52 billion from the federal government.

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On July 28, 2022, the U.S. House of Representatives passed the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Bill (H.R. 4346) to provide assistance and subsidies worth $280 billion, mainly focused on its semiconductor industry, which is facing competition from China. It is anticipated that President Joe Biden will sign the legislation early the following week.

The bill will give financing for the research and manufacturing of semiconductors totaling $52 billion from the federal government. Also, the bill allocates $2 billion for legacy semiconductors, $2 billion for the CHIPS for America's Defense Fund to be used for microelectronic research and development by the Defense Department, and $500 million for the CHIPS for America International Technology Security and Innovation Fund. Additionally, the measure allocates $1.5 billion for Public Wireless Supply Chain Innovation (ORAN) to expand internet availability.

The domestic production of semiconductor chips had dropped dramatically since the 1990s when it accounted for 37 percent of the market. Today, domestic production accounts for only 12 percent. The CHIPS Act will reinstate the United States as the global leader in the semiconductor industry and invest in domestic economic and national security infrastructure.

East Asia is responsible for 75 percent of the world's semiconductor production. Foreign government subsidies account for up to 70 percent of the cost differential between domestic and foreign semiconductor production. In conjunction with other reasons, overseas semiconductor production has a 25 to 40 percent cost advantage over the United States.

These dynamics must shift if the United States maintains its technological leadership in this essential industry and keeps these high-skill, high-paying employment. Without additional support, such as a tax credit or state and municipal funding, the CHIPS funds, despite being sizable, will typically not entirely compensate for the overseas cost gap.

Advanced Manufacturing Investment Tax Credit (or ITC) was introduced to reverse these trends via Facilitating American Built Semiconductors Act (H.R. 7104/S. 2107, also known as the FABS Act). The ITC gives a 25% investment tax credit for semiconductor manufacturing investments. The credit applies to the construction of semiconductor manufacturing facilities and the manufacturing equipment that goes into those facilities. Incentives are also included for the production of the specialized tooling equipment necessary for the semiconductors manufacturing process. The ITC erases the difference with foreign subsidy regimes and, when paired with the CHIPS grant funding, would completely erase the 40 percent cost difference for leading-edge semiconductor production. In short, the ITC offers a baseline incentive for reshoring chip production, which enables grant funding to be concentrated on cutting-edge semiconductor technologies that are particularly important to our country's economic and national security.

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