Semiconductors

Case Study: Semiconductors

Facebook may be the subject of a Hollywood movie, but that company has a mere 800 employees. Microchip manufacturing, while far less glamorous, employs some 200,000 workers throughout the United States. With 2009 sales of $115 billion, the U.S. semiconductor industry sold 81 percent of its output outside the United States.

Given their size and global success, you would think that chip makers could do without subsidies and tax breaks. But their high profile only gives them more bargaining leverage: from the largest to the smallest, chip makers pit states and localities against one another for the privilege of hosting semiconductor manufacturing facilities.

In October 2010, California-based Intel announced that it would upgrade three of its U.S. plants and build a new one, investing up to $8 billion in plant and machinery – making it one of the largest construction projects in the nation. Intel, founded in 1968, is far and away the world’s largest semiconductor company, three times larger than its next biggest U.S. competitor, Texas Instruments. With 2010 revenue estimated at over $42 billion, Intel relentlessly seeks property, income and sales tax breaks. For instance:

  • Chandler, Arizona.  After a 1993 nationwide competition, Intel chose this Phoenix suburb for a new $1.3 chip plant. In exchange, the state promised $7 million in tax exemptions and over $25 million in credits, as well as a 15-year, $50 million property tax abatement. In 2005, in exchange for an expansion, Intel demanded that the state rewrite its corporate income tax code (adopting Single Sales Factor) so that Intel's state income tax bill was greatly reduced if not eliminated. The legislature and Gov. Janet Napolitano complied.
  • Rio Rancho, New Mexico.  Intel chose another Southwestern site in 1993, in the Albuquerque suburb of Rio Rancho after a multi-state contest for a $1 billion plant expansion – then the largest in the industry. Intel received $1 billion in industrial revenue bonds, with Sandoval County technically owning the facility, exempting Intel from property taxes. By 1995 the IRB issue had risen to $8 billion, with Intel’s ten-year property and sales tax subsidies reported to be worth about $455 million. Intel is now the state’s largest private employer.
  • Hillsboro, Oregon. Intel is also the largest private employer in Oregon. In January 1999, it announced plans to spend $12 billion on an expansion of its semiconductor operations in Oregon, but said the investment was contingent on receiving an extension of tax breaks it had first received in 1974. These were estimated to reduce Intel’s property tax bill by $200 million over 15 years. In 2005 Intel got county-level property tax breaks extended to 2025, locking in an estimated $579 million in additional savings. Intel currently has three sites around the Portland suburb of Hillsboro with some 16,000 workers – and plans to add another location.

Other semiconductor corporations, both foreign and domestic, have also been successful in acquiring public subsidies.

Idaho.  When Micron Technology – already Idaho’s largest employer – sought to expand its Boise operation in 2005, the state was eager to capture the jobs.  Micron received an R&D sales tax exemption on new equipment for research and development, and an $800 million limit on its valuation for property tax purposes.

Maine.  One of the oldest chip makers, National Semiconductor, sought in 1995 to expand its operations in South Portland As inducement, the state offered a 50 percent reduction in property taxes through a tax increment financing agreement, as well as its Business Equipment Tax Reimbursement program. In 2001, the Maine Citizen Leadership Fund estimated that over a projected 15 years of subsidies, National Semiconductor stood to receive a total of $123 million, or some $229,000 per employee.

Michigan. Hemlock Semiconductor, a joint venture of Dow Corning and two Japanese companies, manufactures silicon for semiconductors and photovoltaic cells. To help the energy-intensive company pay its electricity costs at its Saginaw plant, the legislature enacted a tax credit worth up to $357 million. The credit was made fully refundable, meaning that if Hemlock’s tax bill is not big enough to make use the full credit, the company will receive the difference as a cash payment.

New Mexico.  Philips Semiconductor (now NXP) inspired by Intel, in 1995 asked the state for a deal combining industrial revenue bonds and public ownership of the facility to make it exempt from property taxes on an Albuquerque plant. The result was a $200 million bond issue, the largest in the city’s history. In 2000 Philips received another $400 million in bonds, resulting in $22 million in property tax savings as well as $19 million in state sales tax exemptions on the purchase of equipment. In 2002, Philips announced the closing of the Albuquerque facility.

New York.  As of late 2010, Advanced Micro Devices, one of the top five U.S. microchip manufacturers, was constructing a $4 billion plant in Malta, just north of Albany. In 2006, the state legislature had approved a smorgasbord of subsidies for the factory totaling $1.2 billion, or more than $1 million for each new job.  In 2008 AMD sold a majority stake in the project to an Abu Dhabi entity, and the following year the new company, now named GlobalFoundries, won an additional $15 million from New York for agreeing to use union construction labor.

Oregon.  In 1995, LSI Logic (now called just LSI), bargained with the state and Multnomah County for a $113 million tax break under the new Strategic Investment Program. In return, the company would build a $4 billion series of chip plants in the Portland suburb of Gresham with a projected 2,600 employees. LSI got the breaks, but never employed more than 800. In 2006, it sold its Gresham operations to ON Semiconductor.

Texas.  South Korean electronics giant Samsung chose Austin for its first foreign chip plant in 1996 after the city council and Travis County approved a 40-percent property tax abatement (with a provision that it could rise to 55 percent if the company hired a certain share of local low-income workers). When Samsung proposed an expansion of the plant in 2003, city, county and state officials responded with $233 million of local property tax abatements, plus a $10.8 million grant from the Texas Enterprise Fund.

Tennessee.  In 2008 Hemlock Semiconductor (see above) announced plans for a $1.2 billion silicon plant in the Nashville suburb of Clarksville. Hemlock was offered $114 million in development and training grants, plus $74 million in local subsidies, including low-cost land and a 23-year, 50 percent local property tax abatement worth an estimated $40 million. Also in 2008, German silicon manufacturer Wacker Chemie announced a $1 billion project in Cleveland, 20 miles northeast of Chattanooga. The $1 billion project was given a subsidy package said to be worth $75 million to $100 million in infrastructure improvements, tax credits and job training grants.

 Virginia.  In 2000, German-based  Infineon Technologies won $55 million in grants from Virginia to expand an existing chip plant outside of Richmond. Production sagged in 2006, and Infineon spun the company off to a spinoff called Qimonda, which filed for bankruptcy in early 2009, putting the plant up for sale.

 Like other high technology products, microchips are susceptible to short, volatile product life cycles and off-shoring of jobs. Indeed, in 2009, the Labor Department estimated that total employment in semiconductor and other electronic component manufacturing would decline by one-third over the next decade.

 With states and cities likely to be playing musical chairs for a shrinking number of microchip jobs, the manufacturers will expect to keep calling the tax-break tune.