Tax Policies

Issue:

To promote increased productivity and long term growth, the SIA supports tax policies that encourage investments in research and manufacturing in the U.S. While the tax bill passed last year included a number of provisions that strengthen America's competitive position, U.S. industry continues to be pressed by overseas competitors who enjoy more favorable tax policy creating a continued challenge for U.S. policy makers. These issues are particularly timely as President Bush's Advisory Panel on Federal Tax Reform will develop, by the end of September, its recommendations to reform the tax code so as to strengthen the competitiveness of the United States in the global marketplace.

Importance:

Investment in high technology goods and services will help spur growth throughout the economy. America's future economic growth depends not only on its ability to utilize information technology, but also on its role as a manufacturer of the high tech products that drive the information age. The U.S. represented over 30 percent of the world semiconductor market in 2000, but less than 20 percent today, a troubling reflection of the movement of electronics assembly (i.e. semiconductor consumption) offshore. While there are a number of factors that determine the location of production facilities; including relative labor costs and proximity to markets; government policy - both foreign and domestic - also influence investment flows. The U.S. can take a number of steps to improve the competitive position of the high technology sector in both the short and long term.

SIA Position/Action:

• R&D Tax Credit
  The R&D credit promotes research in the U.S. The credit was first passed in 1981, and has been extended 11 times since - most recently for 18 months. The credit is currently scheduled to expire at the end of 2005. To provide predictability in research planning, the Congress should pass the Invest in America Act (S. 627/HR 1736) and make the R&D tax credit permanent. Equally important, Congress should also recognize that many companies invest significant sums on R&D yet cannot use the credit as currently structured. Congress should increase the rates for the Alternative Incremental Credit and enact the Alternative Simplified Credit that allows companies to elect a formula that provides the same benefit allowed taxpayers who use the current regular credit. Enhancements to the R&D credit, such as those included in the Senate bill last year should be part of any tax reform package.
• Depreciation/Expensing
  Accelerated depreciation or expensing of high technology equipment would have a particularly positive investment impact. Many of our economic competitors - who actively seek to lure investment in semiconductor manufacturing overseas - offer far more favorable tax treatment than that offered in the United States. As part of the discussion of fundamental reforms of the tax code to promote investment and manufacturing in the U.S., the Congress should consider allowing companies to expense high technology equipment.
• Rate Reductions
  Tax differences are the major reason behind a $1 billion 10-year cost difference between building and operating a fab in Asia versus the U.S. As result of recent reductions in Europe, U.S. corporate tax rates also now exceed most European nations. SIA is encouraged by last year's FSC/ETI resolution that will effectively reduce the rate for domestic production to 31.85 percent over five years. However with substantially lower rates or tax holidays overseas, Congress must continue to consider further significant rate reductions if manufacturing is to remain in the U.S.
• International Tax Reform
  SIA supports a rethinking of international taxation rules as current rules discourage companies from repatriating their foreign source earnings. The U.S. should consider alternatives to its current rules on taxing foreign source income. Many of the companies that compete against the U.S. operate under territorial tax systems, or otherwise more favorably treat foreign income. The move toward contract manufacturing, a result of the escalating cost of chip factories, puts an additional burden on U.S. companies because their offshore income may be treated under Subpart F rather than as deferred income.
• Broadband Investment
  The bill passed by the Senate last year allowed broadband providers to expense 50% of the cost of new current-generation broadband infrastructure in rural and underserved areas or 100% of the cost of new next-generation broadband. Investments in broadband infrastructure will increase productivity in the U.S. economy and stimulate economic growth both at component companies upstream of the broadband service providers and at content providers further downstream. SIA urges the Congress to adopt the Senate's broadband provisions.