The CHIPS ACT Is Not a Subsidy Program, and It Will Not Address Any Given Company’s Competitiveness Challenges

While the United States once led in semiconductor production, by 2020 its share of global fabrication was down to just 12 percent, with most leading-edge semiconductor production located in Taiwan, a nation the Chinese government wishes to incorporate. Recognizing this, Congress passed the CHIPS and Science Act of 2022, which included $39 billion for grants, loans, or incentives for companies to expand semiconductor manufacturing production and added a separate 25 percent investment tax credit.

Perhaps because so few people in Washington understand the nature of international business competition, many paint this program as a subsidy. For example, a former Obama administration official argued at an off-the-record dinner ITIF attended recently that he opposed the CHIPS Act because it would by definition raise the profits of semiconductor firms. Elsewhere, Sen. Rick Scott (R-FL) recently sent a letter to Intel CEO Pat Gelsinger asserting that, “Given this massive federal windfall for Intel, I write with grave concern regarding the recent announcement by Intel to cut 15 percent of its workforce.”

But, no, CHIPS is not a subsidy. It’s an attempt to convince semiconductor firms to invest in a place where few would normally invest: the United States. Few rational firms would invest here because costs are higher and government incentives lower than they are in other markets. In fact, building a new fab in “Asia” is 30 percent cheaper than building one in the United States—and it’s about 50 percent cheaper in China.

As such, the key point of the bill was to reduce the cost gap with other nations to make it economically feasible and sensible to manufacture semiconductors in the United States. It’s not about subsidizing companies or giving them money to undertake investments that they would have made anyway. It’s about removing the rationale for making those investments in Asia instead of in the United States.

This is critical to realize because as U.S. semiconductor “champion” Intel struggles financially, some, like Senator Scott, argue the CHIPS Act provided them with ample subsidies. But this misses the fact that Intel has not received “a massive federal windfall.” When adding in the actual grant and tax credits, it appears that Intel (as well as Samsung, TSMC, and others), received direct and indirect federal support of around 30 to 35 percent of the total costs of investment. In other words, given that the cost delta between the United States and other nations is between 30 to 50 percent, these federal incentives do not end up providing any additional revenues to these firms.

On top of that is the fact Intel has not yet actually received a single dollar of the grants announced. Rather, the economic straits Intel finds itself in—its revenues fell by 13 percent in 2023 to $54 billion, explaining why the company was forced to make its recent reduction in force—exemplifies exactly why the timely dispersal of CHIPS Act funds is so urgently needed (and not just for Intel but other recipients as well). So, with respect to Senator Scott’s assertion, he gets it precisely backwards: Intel needs to actually receive these funds so it can move forward with executing its capital investment plans.

Further, America simply cannot afford to lose Intel—to do so would be to shrivel American knowhow, infrastructure, research and development (R&D), and workforce in the critical area of microelectronics manufacturing. That would harm the entire U.S. semiconductor ecosystem and industrial commons, endanger national defense (Intel is a critical supplier of chips for defense needs), and be nearly impossible to reconstruct if lost. If policymakers agree America needs a healthy Intel, then they should stop claiming Intel received a subsidy. It did not. If Congress wants to help domestic semiconductor companies, the most effective step it can take is to double the R&D tax credit and restore first-year expensing, given that American tech firms on average do more of their R&D domestically than foreign firms.

And of course, the Commerce Department could help by ceasing to look at this program as social policy (e.g., requiring day care centers), run by green eyeshade accountants worried about every dime. Let’s just get the money disbursed.