Changes in the US Legislative Landscape

0

Despite a number of serious and ongoing geopolitical events, the summer of 2022 has seen significant change in the United States, with the passage of two key pieces of legislation by Congress. Irene Lynch Fannon discusses what the media calls “CHIPS and scientific law‘, and the Inflation Reduction Act…

Geopolitical developments often alter the environment in which our clients develop their short and medium term business strategies. In 2022, a series of geopolitical events, including the conflict in Ukraine, climate change causing droughts and floods, and the effects of Brexit, all capture our attention, leading some to speculate on opportunities and others to react defensively. Success sometimes lies in the ability to identify, adapt and seize new opportunities. In this context, significant changes have taken place over the summer months in the United States with the passage of two key pieces of legislation by Congress. The first is referred to in the media as the “CHIPS and Science Act” and the second, the Inflation Reduction Act.

The CHIPS law and science

The first, which has several different titles or sections and is primarily an appropriations act, received a lot of attention because it allocated significant federal funding to support the manufacturing of particular products, in addition to providing targeted funding for technologies and initiatives and scientific research. The short title is actually an acronym for creating useful incentives for semiconductor production in America. The majority of the legislative provisions it contains are driven by political concerns to ensure U.S. leadership in manufacturing high-level technologies.

Additionally, supply chain vulnerabilities are raising concerns due to an overreliance on overseas manufacturing of crucial components such as semiconductors and microchips. There is also a broader and long-standing concern about the repatriation of certain types of manufacturing to the United States. Another concern, shared by other countries, is China’s growing “high-end” manufacturing capacity.

The law, which took effect in August, allocates $52.7 billion in subsidies to US chipmakers establishing or expanding operations in the United States, and $200 billion to invest in research into technologies such as artificial intelligence, robotics and quantum computing. The law received cross-party support with a significant majority vote in the Senate and approval in the House, following new tax and spending deals with some “resistant” Democrats. President Biden said in signing the law that the new initiatives would result in lower prices for the American consumer for everything “from cars to dishwashers.” It is clear that the initiative represents opportunities for these particular sectors.

However, another feature of the legislation is what is described as the “safeguards” approach, preventing US companies from investing in Chinese companies and entities engaged in similar high-tech industries. This piece of legislation is designed to protect intellectual property and, indeed, American jobs. At the same time, this particular aspect highlights what is truly compelling about this new legal framework. It represents a level of government engagement with specific industrial policy that is unusual in the United States. The legislation has been described as a significant shift in approach to industrial policymaking and the largest planned US investment in industrial development in more than 50 years (Peterson Institute for International Economics). That said, while different in terms of recent US approaches, such investment and planning is not unusual in the EU or, indeed, in other major economies, such as Japan.

Incidentally, after the law was signed, several initiatives by major US semiconductor manufacturers were launched. However, recent reports indicated that further instability in this sector developed later in the summer, with major manufacturers now reporting a glut of inventory in the United States, due to unpredictable supply chains. associated with a decline in consumer demand for a range of products.

The Inflation Reduction Act

The second key piece of legislation that was passed over the summer – the Inflation Reduction Act, which was originally called the Build Back Better Bill. However, growing concerns about inflation and the need to deal with difficult economic developments led to a title change. Three aspects of this legislation stand out. First; significant allocation of funds for clean energy initiatives. Second; the clarification of a tax strategy for large companies and, thirdly; changes in federal spending on prescription drugs provided under the Medicare system.

Clean energy initiatives include a $30 billion allocation to support the construction of alternative fuels initiatives supporting infrastructure, including support for solar panels, wind turbines, battery manufacturing and geothermal power plants. An additional $30 billion has been allocated for grants and loans supporting the transition of utilities to clean energy.

From a tax perspective, the Act includes provisions to prevent larger corporations from exploiting tax loopholes that allow them to pay little or no federal income tax, by imposing an alternative minimum tax of 15% to corporations whose average annual adjusted financial statement revenue exceeds $1 billion over a consecutive three tax year period. This tax is expected to generate around $300 billion in revenue for around 150 companies. The legislation also includes other tax reforms intended to make the tax code fairer and also provides approximately $80 billion in additional funding over the next 9 years for IRS enforcement, operations, tax modernization systems and customer service, with the Congressional Budget Office estimating that the application funding will generate $204 billion in additional revenue through 2031.

Finally, the legislation will allow the federal government to negotiate and cap the prices it will pay for designated prescription drugs provided to millions of Americans through the Medicare system. Medicare supports access to health care and prescription drugs for Americans over 65 and other vulnerable groups, and represents a significant market of more than 55 million people. This initiative builds on an already complex classification system for drugs and pharmaceuticals paid for by the federal government under Medicare. It enhances the ability of the government agency operating the system to negotiate prices and penalize companies for particular pricing strategies. The plan is that it will result in $200 billion in budget savings that can be used elsewhere.

Both of these pieces of legislation appear to be politically popular in the United States, and their success represents a potential shift toward continued support for the Biden administration that would not have been expected earlier in 2022.

Share.

Comments are closed.