By Kenneth Rapoza, CPA Industry Analyst
In a Senate Finance Committee hearing on Tuesday, Ford and Intel ask for more tax incentives to keep manufacturing domestic. Meanwhile, Senator Sherrod Brown of Ohio reminds Ford that they just reneged on a promise to invest nearly $1 billion in northern Ohio despite the tax breaks they say are currently fine.
The bad news is that multinational corporations like Intel and Ford are warning that unless they keep key tax incentives in the Biden administration, they will essentially be forced to outsource.
“We have a roughly 40% cost disadvantage to Asia and this is critical to advanced manufacturing. Without congressional action, 67 years of pro-R&D policies will be reversed, especially if we can no longer deduct R&D investments,” warned George Davis, Executive Vice President and Chief Financial Officer of the Intel Corporation. Davis was one of five people to provide testimony on Tuesday during a Senate Finance Committee hearing titled “Made in America: Effect of the US Tax Code on Domestic Manufacturing.” Davis was the first to speak after introductions by Chairman Ron Wyden (D-OR) and his comments were like a shot across the bow; almost a threat as much as it was a warning. The witnesses seemed less interested in focusing on job onshoring than avoiding business penalties for offshoring jobs.
Without being able to write-off R&D investments annually, as they can now, as opposed to amortized over a five-year period, as some are proposing, then “it will make it more costly to invest here. If this happens, it is a regressive policy. Right now the US is uncompetitive in attracting new semiconductor investments.”
Intel invests about $13 billion in R&D annually. He said the CHIPS Act was a positive step, adding that it would allow the US to compete with foreign companies, nearly all of them in Asia.
The good news is that despite Biden’s talk of raising taxes, there is bipartisan support for extending the R&D tax credit, among other things extended in the Trump years, said Wyden who was pounding the table to make these tax incentives long term.
Other Committee members wondered if it was okay if we raised the C-Corp rate while keeping the incentives.
“What if the C-Corp rate goes up but the R&D tax write-off remains?” asked Senator Mike Crapo (R-ID).
China is allowing for 100% write-offs of research and development costs and will increase its R&D spending by 7 percent, the CCP said during last week’s 14th Five Year Plan roll out.
China is building 17 foundries – the manufacturing centers that build mostly American designed microchips – while the US is thinking of building one in Arizona, which will be owned by Taiwan Semiconductor.
Whether raising taxes here, while allowing for write-offs and other incentives there, was a good idea to help manufacturers of all sizes, the answer across the board from those who provided testimony from corporate America, advocacy groups like the National Association of Manufacturers, union leaders and one MIT economist was a resounding no.
“The latest data we have shows that the R&D tax credit works,” said Michelle Hanlon from the Sloan School of Management at MIT. She noted that the proposed CHIPS Act is a sizeable credit: some 40% in the first year and would incentive investment. “But the overall tax system needs to remain competitive if these temporary incentives are going to be effective. In terms of changes that will phase out, the R&D write-off is one of them. Biden’s tax plan includes raising C-Corp and the Alternative Minimum Tax. The proposed AMT is concerning because such a policy can offset the tax incentives.”
Jay Timmons, President and CEO of the National Association of Manufacturers said that small and mid-sized manufacturers that invested here during the Trump tax cuts would be hurt by this going forward.
“These tax changes will make it harder to grow manufacturing here at home,” Timmons said.
What’s at Stake?
Senators were most concerned about semiconductors and the build out of EVs. Both of these important, future tech industries are highly dependent on Asia. For semiconductors, almost half of the chips companies like Intel designs are made in Taiwan. Taiwan Semiconductors is the market leader by far, and is one of the reasons for a supply chain shortage that has shut down numerous automotive plants worldwide.
For automotive, the biggest battery makers – companies like LG Chem and SK Innovation, both of South Korea, are in an IP fight that threatens Ford. LG Chem is their battery maker.
Senator Maria Cantwell (D-WA) asked a representative from Ford how that IP spat between SKI and LG Chem would impact Ford, which is caught in the firing line.
“If we don’t have other battery cell providers in the US, we will have to look at foreign suppliers,” said Jonathan Jennings, Vice President of Ford’s Global Purchasing and Supplier Assistance.
The manufacturing sector is critical to the US economy. In 2019, it accounted for 11 percent of our GDP. Its decline is mainly due to automation, labor and environmental arbitrage that benefited China once it entered the WTO in 2001, and taxes.
Taxes are often a decision maker when companies are deciding where to invest. Prior to the tax cuts of 2017, the US had a 35% statutory corporate tax rate, one of the highest in the developed world. Now we have a flat 21% rate, yet the US still holds the 11th highest among developed countries, noted Crapo, who is against any tax hikes on offer.
Beyond that, he said that “protecting our supply chains is vital to our national security.”
Tuesday’s hearing was all about using the tax code as a way to make that possible.
“I think the last thing we need is more short-term tax policies,” Wyden said. “Would it be fair to say that our chip manufacturers need to have a long term strategy if we are going to get out of this,” he said in regard to the existing shortage, and the fact that China’s if fast gaining on the US. Only 12 percent of global semiconductor manufacturing takes place here, with 80 percent of it happening in Asia. That market is growing five times faster there than here, due to robust incentive programs offered by those countries.
Intel’s VP responded: “The R&D issue around deductibility and investment tax credits are very important issues for long term stability and for attracting investment. For every $1 billion spent, it equals about 17,000 jobs,” he said in regard to a bill called the American Innovation and Jobs Act. https://www.congress.gov/bill/116th-congress/senate-bill/4822 That bill has been sitting in the Finance Committee since October 20. “We agree that changing the deductibility to amortization is a very regressive step,” he said. “We would discourage it.”
On EVs, Wyden said he did not want “to end up being reliant on China for batteries. A lot of people are thinking as we shift to an all-electric future, that can happen.”
Issues such as maintaining EV tax credits to making the entirety of the EV supply chain more domestic were brought up at the hearing.
Senator Catherine Cortez-Masto (D-NV) noted that the US needs to be a supplier of the raw minerals, like lithium and cobalt, among others, rather than relying on foreign sources. “Being able to obtain these critical resources will help incentive domestic technology here, and we can help control environmental concerns (from mining) at the same time,” she said. “We need efficient safe, raw material extraction.”
Jennings from Ford said that they do consider the cost of materials, of which the metal materials that go into battery cells are a part. If those materials are sourced cheaply in China, then the battery cell will be cheaper and Ford, like every other car company, wants to keep EVs as affordable as traditional gas powered cars. That means lower costs for the biggest expense in the car – batteries and battery packs.
“We look at that, because it’s part of the value chain. All the way through the value chain has to be competitive,” he said.
By 2040, it is estimated that most new cars sold will be battery powered. China is home to the majority of lithium ion batteries – the main new “engine” of these revolutionary new vehicles, while the US has a woeful 12 percent market share. Jennings called this “unacceptable.”
Jennings added that, “The future is electric and it must include America, but it needs market-based incentives and supply chain security from Congress.”
We are not sure that is all it needs.
And neither is Sherrod Brown (D-OH) who rightfully called out Jennings and his company for relinquishing on a promise to invest some $900 million in a manufacturing facility in northern OH. Instead, they invested around $150 million, Jennings admitted, with the rest going to Mexico.
Although Jennings did not say it, we assume it is going to Mexico not because of the lower C-Corp rate and agreeable R&D write-offs, but because the company either assumes higher taxes under Bided or was attracted to lower hourly wage labor south of the border.
“I’m hopeful we can find a way to fix this,” Brown told Jennings.
Another issue that was not addressed is the lack of requirements on the intellectual property under research being located in the US. Only the location of the actual research and development is required to happen in the US. The IP can be elsewhere.
Wyden closed by saying that there was “bipartisan interest” wrapped up in this issue of resilient supply chains by building up “domestic manufacturing in semiconductors” and in other critical components.
“The Biden administration told us nothing is off the table when it comes to strengthening our supply chains,” Wyden said.
Judging by what we heard today, either companies are moving because they are reading the tea leaves and expect to get taxed more. Or they are doing what they have done for decades – seek out the lowest labor cost and freebies wherever they can get them.
Wyden said he recognized that many American cities and towns have seen a steady decline in manufacturing over the years. “This is our opportunity to turn this around. Investment in R&D and in advanced manufacturing are going to be the lone star to this committee and are exactly the kind of jobs we want,” he said. “We are working on advanced manufacturing credits. We need long term legislation and solutions.”