Proposed Amendment to “China Bill” Would Wrongly Reward Unprofitable Investments

COMMENTARY Taxes

Proposed Amendment to “China Bill” Would Wrongly Reward Unprofitable Investments

May 24th, 2022 4 min read
COMMENTARY BY
Preston Brashers

Senior Policy Analyst, Tax Policy

Preston is a senior policy analyst for tax policy in The Heritage Foundation’s Grover M. Hermann Center for the Federal Budget.
After receiving the credits, firms would be as well off losing 15% on a semiconductor investment as earning a 10% profit investing in other manufacturing facilities. sefa ozel / Getty Images

Key Takeaways

Some lawmakers are pushing to include tax laws that would blatantly subsidize unprofitable private investments.

Chances are, by the time the semiconductor legislation has time to have any real effect, the private economy will have largely resolved the computer chip shortage.

In typical Washington fashion, the swamp seems determined to force this country two steps backward for every step it allows us to move forward.

If someone can’t manage his or her own financial affairs, it’s a good bet they’d manage other people’s finances badly, too.

Given that the federal government has racked up an enormous $30 trillion of debt—$6 trillion in just the past two years—nobody should trust that federal legislators know the first thing about sound investing.

Case in point: As congressional committees continue to debate differences between the House and Senate versions of the America COMPETES Act, the so-called China bill, some lawmakers are pushing to include tax laws that would blatantly subsidize unprofitable private investments.

On top of the $50 billion of direct subsidies for semiconductor companies already packed into the 3,000-page, $350 billion omnibus package, the Senate Finance Committee’s chairman and ranking member—Sens. Ron Wyden, D-Ore., and Michael Crapo, R-Idaho, respectively—want to add another massive subsidy disguised as a tax credit to build semiconductor manufacturing facilities.

The federal government would offset every $100 a company spends on the purchase or construction of semiconductor facilities with $25 in tax credits. So, after receiving the credits, firms would be as well off losing 15% on a semiconductor investment as earning a 10% profit investing in other manufacturing facilities.

That type of narrow preference is a textbook case of bad tax policy.

Supposedly, the tax preference is meant to strengthen U.S. semiconductor manufacturing. However, by driving companies into unprofitable investments, the government would make the industry weaker, not stronger.

While the domestic semiconductor industry might grow in the short term, it would grow reliant on continuing corporate welfare to stay afloat.

Tax subsidies for semiconductor investments would make every other industry weaker, too, by starving them of the capital they need to make sound investments.

To justify the tax subsidies, supporters point to supposed vulnerabilities in global supply chains, which they claim are too reliant on foreign manufacturing of computer chips.

There are several problems with that line of reasoning.

First, similar arguments could be made with respect to countless other industries. Americans also rely on food, oil and gas, medicine and medical devices, metals, lumber, trucking and shipping, and innumerable other goods and services. But our debt-ridden nation simply can’t afford to subsidize bad investments in every industry that policymakers consider important.

Indeed, right now, Americans face a more pressing shortage of baby formula. The baby formula crisis has nothing to do with overreliance on foreign markets. If anything, the opposite is true. Imports account for only 2% of baby formula consumed in the United States.

The baby formula crisis stems from the closure of a single manufacturing plant in Michigan, along with some harmful government interventions, including protectionist tariffs and quotas.

Government interference causes far more economic crises than it solves.

Chances are, by the time the semiconductor legislation has time to have any real effect, the private economy will have largely resolved the computer chip shortage, independent of massive government intervention.

By then, lawmakers may well be focused on “solving” a wholly different supply chain issue. The economy will inevitably face future supply shocks, and lawmakers are ill-equipped to predict beforehand which products will be affected. So, instead of looking forward, they look backward to the most recent crisis.

A better way for Congress to reduce the risk of future supply chain issues would be to focus on removing the artificial barriers to investment that the government places on U.S. businesses.

That doesn’t require legislators to have any special foresight of future events, though it might require a shift in mindset. Instead of viewing government as a rescuing savior, Congress must acknowledge that government is usually the problem, not the solution.

The tax code is filled with artificial barriers to investment. Indeed, investment routinely faces double or triple taxation. When businesses—at least those in industries that don’t get sweetheart tax deals—invest in new structures, they aren’t allowed to fully deduct the cost of such expenses for up to 39 years, strongly discouraging otherwise profitable endeavors.

Along the same line, one new barrier to investment in the tax code, as of January, is the requirement that businesses amortize research and development expenses over five years.

Because of this provision, only 20% of research and development spending can be deducted in the year the expenses were incurred. As a result, companies that perform research and development may be punished with a tax on phantom profits that they never realize.

That punishment of research and development investments will be especially severe if inflation continues to rage, because any deductions carried forward would be worth far less after five years of inflation sapping the value of each dollar.

To their credit, Wyden and Crapo are also considering ending the harmful amortization rules for research expenses. Unfortunately, they aren’t putting this sensible tax change, which has broad bipartisan support, up for a simple up or down vote. Instead, they want to tie it to the narrow tax preferences for the semiconductor industry in the $350 billion “China bill” omnibus package.

In typical Washington fashion, the swamp seems determined to force this country two steps backward for every step it allows us to move forward.

This piece originally appeared in The Daily Signal