The CHIPS Act Challenge for State and Local Governments

As an innovative and unusual foray into industrial policy, the $50 billion-plus bipartisan CHIPS and Science Act has been heralded as key to the U.S. in regaining technological leadership, bolstering national security, solving ongoing supply issue problems, and sparking innovation and research. It’s all in an effort to revitalize an industry that has “fallen out of balance,” in the words of U.S. Secretary of Commerce Gina Raimondo. As she recently pointed out, “In 1990, the U.S. accounted for 37% of global chip manufacturing capacity. Today, that number is only 12%."

For state and local governments, this is a huge economic development opportunity. The CHIPS bill, New York Gov. Kathy Hochul said in a statement, “will help New York create 21st century jobs and technologies and become a global capital for chip manufacturing.”

Economic development hunger is hardly new and the CHIPS Act has sparked tremendous state and local excitement. The federal government’s dramatic push for development is an alluring extra. “There’s always significant interest in getting companies to come to the state, but now there’s a federal lollipop on top,” says one CHIPS Act researcher who has carefully studied the department’s Notice of Funding Opportunity (NOFO) that was released at the end of February.

The 75 pages of guidance lays out the process for applying for the federal subsidies that will encourage semiconductor companies to build the computer chips needed for, among other things, smartphones and refrigerators. It comes with a host of open questions about how the Commerce Department will make its choices, and how much state or local actions will feed into the ultimate decisions.

The first set of mostly advanced semiconductor companies will be working on their applications over the next few months. That is just the beginning in a volley of awards, with more funding instructions subsequently geared to often smaller companies that will provide manufacturing or other technical support for the development or expansion of semiconductor facilities. An additional $10 billion is designated to build hubs of innovation to support the semiconductor industry, with the first steps of that process detailed in an article by Route Fifty’s Kery Murakami last week. 

One of the open questions for the first set of grants is the role that state and local incentive actions will play as Commerce begins to make its decisions. A requirement that was built into the August 2022 law was that corporate beneficiaries of CHIPS Act funds must demonstrate that their state and local partners have skin in the game. The specifics were not spelled out, and prior to passage, megadeals involving a variety of tax breaks and other fiscal incentives were already signed involving semiconductor companies like Micron in Central New York, Samsung in Taylor, Texas, Intel near Columbus, Ohio, and the Taiwan Semiconductor Manufacturing Company in Phoenix.

Those deals involved large tax breaks for companies. For example, the agreement involving Taylor, Texas, population 16,267 in the 2020 census, included property tax breaks from the city, the Taylor School District and Williamson County that were estimated at $954 million over several decades, according to estimates by the Austin American-Statesman. Two deals—involving New York and Ohio—were among 2022’s eight $1 billion-plus direct company subsidies listed in a database from Good Jobs First, an advocacy group with a long record of opposing large tax incentives.

“That’s an all-time off the charts record,” says Greg LeRoy, executive director, who worries about misinformation that has circulated among government officials—sometimes encouraged by consultants—that governments were being required to match federal fiscal benefits and tax breaks. “That’s absolutely not true.”

Up until recently, a lot of speculation has viewed those companies and states as early leaders in the play for federal dollars. They still may be. But state and local governments now must also pay heed to clear signals from the Commerce Department that it is not looking favorably at large state and local tax incentives that are directed at one company, but has a strong preference for government assistance that is directed at strengthening workforce development, infrastructure and educational institutions that will support the larger community, create good jobs, supportive economic partners, contribute to the success of semiconductor development and rebuild economic opportunity for areas that have so far missed out.

“A smart government will look at how the NOFO describes state and local incentives and how it specifies that the Commerce Department will encourage projects that create spillover benefits,” says Ellen Harpel, president of Business Development Advisors and CEO and founder of Smart Incentives, which works with state and local governments to help them use incentives effectively and responsibly. “I think if governments are paying attention, that’s what the Commerce Department has said is important.”

It’s probably too soon to tell, Harpel says, whether the instructions—which are directed to companies and not to governments—have started to encourage changes in executive or legislative direction. She also notes that the deals that have already been signed provide taxpayer support of workforce development and infrastructure improvements.

That said, direct company tax breaks are a long-term staple—and top selling point—for governments that need to compete for company relocation and expansion. “If anything, the CHIPS Act has really deepened and amplified the use of tax incentives,” says Nathan Jensen, a professor at the University of Texas at Austin, who has written extensively about incentives and economic development.

There are other open questions and challenges in the CHIPS Act policy vision—vulnerabilities that are familiar to us and other longtime observers of policy implementation. One question revolves around just how far $39 billion will go, how many states and local governments will ultimately achieve their own economic development dreams, and—beyond the big corporate players in the semiconductor—how many companies in supporting roles will be singled out when other “funding opportunity” instructions are subsequently aimed at them.

Other issues involve the greater workforce expense, culture changes and heightened construction costs faced by companies that are transplanting semiconductor development from other counties, an issue recently raised with regard to the Taiwan Manufacturing Semiconductor Company in Texas. 

Ultimately, there are a myriad of variables that may affect the choices that the Commerce Department makes beyond a government’s fiscal contribution and the form it takes, whether as a tax incentive or workforce development investment. Other factors that will play into the decision: a semiconductor company’s own capacity, a reliable local workforce, available land, manageable utility costs, environmental concerns, supply chain access and a cluster of supportive business partners.

One of the clear goals of the legislation is also to spread out the benefits of economic success, both in the distribution of the first $39 billion and the additional $10 billion designed to create hubs in areas where technology is not already an important part of the economy. The idea is to provide access to good jobs that provide careers and healthy paychecks to lower-income earners.

It’s not uncommon for government policies to have conflicting goals, which presents an ongoing challenge when those policies are implemented. If the goal is to optimize U.S. competitiveness and build a vibrant semiconductor industry, will the distribution of CHIPS Act funding succeed in supporting development in less economically privileged areas?

“There’s a little bit of goal conflict there. We want the cutting-edge technology, but we want to locate companies in rural areas with high unemployment,” says Jensen. “The irony is asking states and local governments to support these projects and have some skin in the game. But the normal way that they do that in many cities and states is through tax abatements, which is discouraged now. I think there are a lot of double takes for state and local governments that are trying to figure out their role.”