What state and local leaders need to know about Biden’s semiconductor subsidies

Quality control and assembly of SMT printed components on circuit board in QC lab of PCB manufacturing high-tech factory

On Tuesday, the Commerce Department released its Notice of Funding Opportunity (NOFO) for the CHIPS Incentives Program, which commits $39 billion in new federal subsidies to spur domestic semiconductor manufacturing. Funded by last year’s CHIPS and Science Act, the program represents a watershed moment for semiconductor manufacturers and the U.S. economy.   

Most notably, the 75-page application stands out for setting detailed conditions that manufacturers must abide by if they want to access these incentives. As such, the CHIPS Incentives Program is a striking, somewhat controversial signal of the nation’s new “industrial strategy”—complete with big construction subsidies, corporate guardrails, and broad economic and national security goals. 

And yet, if the notice is important for the nation and the semiconductor industry, it is equally important for regional and state leaders. Far from solely a mix of subsidies and conditions for manufacturers (who will be the lead applicants), the NOFO very much implicates local and state actors in the nation’s aggressive industrial strategy for the sector.  

That strategy, as Brookings Metro has noted, is highly place-based, with a focus on local industry clusters, local co-investment, and local attention to the “micro” underpinnings of “macro” national goals. Consequently, multiple features of the program will require active collaboration and problem-solving between companies and states and regions. 

Given that, the NOFO sends important signals to state and local leaders about their role in incentivized efforts to revitalize the semiconductor industry. What follows, then, are a few initial takeaways for those leaders. 

Local and state governments will be critical co-financiers, alongside private markets and the Commerce Department 

The CHIPS Incentives Program seeks to maximize private sector financing by semiconductor companies, with the expectation that federal subsidies will only account for 5% to 15% of capital expenditures. But alongside requirements that applicants assemble this private financing, the Commerce Department has also stipulated that companies secure a local or state government incentive to be eligible for the program.  

The rationale is clear: The federal government wants states and localities to put their own fiscal weight behind these projects, effectively sharing in the risk and maximizing the chances of success. But Commerce has a particular view on how local and state governments should structure these incentives. As opposed to firm-specific incentive packages, the NOFO prioritizes incentives that create “spillover benefits that improve regional economic resilience and support a robust semiconductor ecosystem, beyond assisting a single company.” This means prioritizing local and state investment in inputs to industry cluster development that the market tends to underprovide, such as infrastructure, workforce development, and research and development.  

With that said, if the planned semiconductor investments in New York and Ohio are any indication, state governments will be providing job creation tax credit packages to individual companies as well. In the case of New York, the state’s incentive package to Micron Technology is valued up to $6 billion over two decades (roughly 6% of a $100 billion planned investment)—demonstrating that state subsidies could match or exceed the awards from the Commerce Department. These massive fiscal incentives create leverage for state and local governments to demand high-road practices from semiconductor manufacturers, and drastically heighten the stakes for strong transparency, oversight, and public reporting.  

The incentives program prioritizes innovation, in part through regional cluster development 

The CHIPS Incentives Program NOFO stresses that revitalizing the semiconductor sector requires “robust innovation ecosystems” for research and development, and suggests that promoting “cluster-based economic growth” will be crucial to that.  

Given that, local and state economic leaders should not think of their proposed semiconductor manufacturing plant as an isolated construction project. Instead, the NOFO challenges them to detail how that project will promote innovation and attract associated suppliers, workers, and other relevant actors so as to expand a self-sustaining semiconductor ecosystem. 

Local and state leaders will not just have to plan in this regard, but act. Another section of the NOFO describes an example of a desirable “community investment” as “financial support for a research institute or innovation campus to complement a new manufacturing facility and promote cluster-based economic growth.” Similarly, applicants are advised to align such investments with ongoing state and local economic development programs, such as “regional or cluster-based growth efforts,” including those being supported by the Economic Development Administration’s Build Back Better Regional Challenge. Cluster-based innovation strategies are assumed and encouraged here. 

Applicants must develop equitable workforce strategies 

The NOFO is explicit that building “a diverse and skilled set of workers” is a primary goal of the CHIPS Incentives Program. Within this scope, Commerce focuses on both the technical workers who will operate the facility when it is completed and the construction workers who will build, modernize, or expand the facility. Many jobs will be open to people with less than a bachelor’s degree, providing pathways to upward mobility for groups that historically have been under-represented in high-tech industries. Although the semiconductor industry is typically associated with a graduate-degree workforce, Brookings Metro recently showed that 60% of semiconductor manufacturing jobs do not require a bachelor’s degree.   

In support of its goal to develop robust talent pipelines, the Commerce Department requires program applicants to develop a detailed plan for how they will recruit, train, and retain workers. Applicants with an insular, “go-it-alone” philosophy will not fare well. Based on the NOFO’s guidance and requirements, those who situate their workforce plan within their local education and workforce landscape are more likely to be successful than those who develop new programs in isolation. 

Some specific requirements are established best practices in workforce development, such as sector partnerships and wraparound services. The NOFO also asks for more emergent practices, including skills-based hiring, eliminating degree requirements, and prioritizing job quality as both Commerce and the Department of Labor recently articulated. 

Lastly, the NOFO requires that applicants’ workforce plans address an absolutely crucial issue for much of the workforce: affordable and accessible child care. Applicants requesting over $150 million in subsidies must describe how they will provide child care options for facility and construction workers, while applicants who request smaller amounts are “very strongly encouraged” to provide access to child care to the greatest extent feasible. 

With this one step, Commerce is sweeping away one of the most common and seemingly intractable barriers to employment, especially for women—and sparking a welcome debate.  The child care requirement has garnered much attention, with some critiquing it as mission creep into “social policy.” Nonetheless, it is entirely predictable that a lack of child care will be a barrier to worker recruitment and retention, so it is noteworthy that this portion of the NOFO is sufficiently ambitious and forward-looking to tackle that problem at the outset.  

Chandler, Arizona - December 11 2022: Ongoing construction of two new Intel Corp. advanced semiconductor wafer manufacturing factories under the Chips Act; Project Eagle Fabs 52 and 62.

Applicants must show how underrepresented businesses will benefit from construction and operating expenditures 

How supply chains develop around a semiconductor facility will ultimately determine the full extent of the economic impact. Therefore, local, regional, and state implementers must consider how the supply chain’s structure includes economically and socially disadvantaged business owners.  

Specifically, the CHIPS Incentives Program requires that applicants create a Supplier Diversity Plan to target “the inclusion of minority-owned businesses, veteran-owned businesses, women-owned businesses, and small businesses as part of any funded project.” Commerce requires that these plans include supplier diversity goals, commitments to track demographically disaggregated supplier data, and an operational and staffing plan to meet stated targets.  

Some states and companies have already publicly committed to extremely ambitious inclusive supply chain targets. For example, New York is attempting to build a robust, inclusive network of suppliers through Micron’s pledge that 30% of eligible construction spend and 20% of ongoing eligible operating spend occurs with businesses owned by people from socially and economically disadvantaged groups.  

Commerce outlines steps that semiconductor companies can take to meet such targets, including proactive outreach to diverse businesses, investments in supplier diversity programs, utilization of existing supplier diversity intermediaries (both locally and nationally), and shifts in delivery schedules and payment periods to allow for more inclusive participation.  

The program requires attention to broader community conditions and investments 

Finally, the NOFO urges applicants and their metro and state partners to look beyond the immediate construction of facilities to consider ways that the CHIPS Incentives Program can help build strong communities. 

In this regard, the NOFO challenges applicants to ensure that their activities support and contribute to regions’ long-term strategies for economic vitality. But there is no one-size-fits-all way of doing so. Rather, the application asks proposals to forge a clear link between the use of public incentives, private and philanthropic investments, and the characteristics of the individual communities. It mentions, for example, that one project may want to make investments to reduce transportation costs, while another may see the need to invest in building affordable housing. Similarly, other sections stress a focus on environmental responsibility, including water conservation and climate resilience.   

Commerce also requests that companies signal how they plan to work with leaders and organizations in their home communities, including through community benefits agreements. Specifically, the NOFO states that “strong applications will reflect hand-in-hand collaboration with different stakeholders to ensure that community investments eliminate pressing barriers to economic participation and inclusive growth.” Indeed, investing in the civic readiness of recipient regions will be critical for translating major semiconductor investments into broad-based prosperity.  

A sharp departure from business-as-usual 

The Biden administration is taking a broad view of its role in spurring economic growth, and the Commerce Department’s ambitions for the CHIPS Incentives Program clearly go beyond individual new or modernized manufacturing facilities. The department is also prioritizing the strength and resilience of the semiconductor industry as a whole and the well-being of the people and places where manufacturing facilities and their supply chains are located. 

Given that, state and local leaders—and their corporate partners—would be wise to take advantage of this opportunity, while at the same time recognizing that it will test all parties in new ways.