Arizona has substantially expanded its semiconductor manufacturing presence over the past couple of years, underscored by major new investments from Intel Corp. and Taiwan Semiconductor Manufacturing Co. along with several new suppliers setting up shop. But recently approved subsidies by Arizona and other state governments are drawing criticism from a tax-research group.
Arizona is one of 12 states to enact or expand recent tax incentives to support the semiconductor industry, reported the nonpartisan Tax Foundation. At $100 million, Arizona’s subsidies rank fifth highest on the list.
The Tax Foundation argues that the $100 million allocation, approved in November under former Gov. Doug Ducey, could represent a “misuse of government funds.” It’s part of a “policy wave that has swept across 12 U.S. states to enact complementary legislation to the CHIPS and Science Act, passed by Congress last August (2022) to bolster U.S. manufacturing and strengthen national security,” the Tax Foundation said.
"While the CHIPS Act was celebrated by many for its objective to counter China’s manufacturing rise, the supplementary provisions adopted across states like Arizona showcase how even well-intentioned policies can have adverse economic consequences,” the group added.
The group didn't specify specific adverse consequences but said such policies could reward favored businesses and industries at the expense of others.
Arizona's incentives among the highestOther states offering incentives include California, Colorado, Florida, Idaho, Illinois, Kansas, New York, Ohio, Oregon, Pennsylvania and Texas. The New York program is by far the largest so far, earmarking up to $500 million annually for 20 years and a reported $5.5 billion awarded so far, the foundation said. Ohio, Kansas and Pennsylvania also are offering potentially larger incentives than Arizona, according to the report released Sept. 11.
In Arizona’s case, $100 million from the federal American Rescue Plan Act was allocated by Ducey to the Arizona Commerce Authority to fund semiconductor infrastructure, workforce and research capabilities, the foundation's report said.
The Commerce Authority didn't respond to a request for comment.
“Narrowly targeted incentives like what has emerged in Arizona distort business decisions and come with opportunity costs,” said Erica York, an economist at the foundation, in a prepared statement. “It’s an inefficient use of limited state government funds that could instead be used for broad, pro-growth improvements for the benefit of all businesses, not just those currently in political favor.”
The CHIPS Act has been a favorite policy of the Biden administration, especially given the pervasive and expanding role of semiconductors in automobiles, military hardware, cellphones, computers and a host of other devices.
Catalyst for semiconductor industry expansionThe CHIPS Act enacted last year aims to provide $280 billion in incentives for domestic semiconductor investment as well as research and development.
“The CHIPS Act was intended to strengthen U.S. manufacturing and national security by encouraging the production of cutting-edge semiconductor technology in the United States, not China,” the Tax Foundation said. “At the federal level, national security concerns are certainly justified — but that does not mean the CHIPS Act industrial policy approach is warranted. Nor does that justification extend to states.”
Allocating billions of dollars of incentives to the semiconductor industry isn’t guaranteed to deliver an equal or higher amount of productive output, said the foundation in its report, adding that state-level incentives “have the very real effect of privileging some taxpayers over others.”
The report urges policymakers at all levels of government to avoid the pitfalls of incentives and focus instead on “creating a more efficient, neutral and structurally sound tax code to the benefit of all types of business investment.”
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This article originally appeared on Arizona Republic: Tax Foundation blasts Arizona tax aid for chipmakers
Arizona's semiconductor presence has expanded in recent years with Intel and TSMC, but its incentives aren't sitting well with a tax-policy group.