Big Pharma Lobbies for Slice of US Chip Industry Tax Breaks

In 2017, former President Donald Trump’s administration passed a business-friendly tax reform that enabled some of the top companies in the pharmaceutical industry to shed much of their tax burden.

Six years later, Big Pharma now has its eyes locked on tax breaks, and subsidies that could be introduced following an executive order President Joe Biden signed last year to spur manufacturing innovation in the country. The executive order issuance was mainly prompted by the recent semiconductor shortages, which highlighted the flaws in the U.S. manufacturing sector.

In his announcement, Biden stated that the executive order would also encompass biotech and biomanufacturing — with an emphasis on job creation, warding off competition from China, and supply chain strengthening— and invited input from the industry.

A new push for tax breaks and subsidies

Last September, President Joe Biden announced an ambitious national strategy for the bio-manufacturing and biotech industry, primarily to boost the country’s competitive edge against China on the bio-manufacturing front.

This saw an initial funding of $2 billion allocated to support the strategy. Biden also requested input from stakeholders in the food, climate, and health industries, specifically on the type of incentives, funding, and other policies necessary to support heightened investment in biotech research and bio-manufacturing.

In response through their principal lobby group, PhRMA, pharmaceutical companies have urged the Biden-Harris administration to give drug makers subsidies and tax breaks similar to the $280-billion support package extended to the semiconductor industry.

Big Pharma claims that the tax breaks and subsidies will go a long way in driving its concerted efforts to ramp up the biotech industry in the U.S. Ultimately, the incentives will help create more jobs, fuel manufacturing innovation, and stave off competition from China, where labor, water, and energy costs are far lower than in the U.S.

More specifically, PhRMA has submitted a proposal for pharmaceutical companies to the U.S. Office of Science and Technology Policy (OSTP) asking for a 25% advance manufacturing tax credit to help foot the construction and expansion costs of bio-manufacturing plants.

In addition, the lobby group has proposed federal funding to offset the cost of loans and deep tax cuts on manufacturing income for pharmaceuticals produced in the country. PhRMA argues that these incentives would help Big Pharma expand and avoid the recurrence of drug shortages experienced during the recent coronavirus pandemic.

Leveling the playing field

PhRMA proposed that the incentives should be extended to all companies building or expanding bio-manufacturing in the United States, no matter where they are headquartered. Of course, this could call for an exemption from a 2017 rule setting the minimum tax obligation for certain multinationals at 10%.

The Big Pharma lobby group acknowledged that the incentives are necessary to offset the edge that competitors operating in countries like China have over them. They noted specifically that labor costs are up to 40% cheaper in India and China versus European countries and the U.S. That’s why these measures are needed to level the playing field.

Subsidy races and trade tensions with allies

However, suppose the Biden-Harris administration goes ahead to implement the lobby group’s proposal and provide tax cuts & subsidies to American drug makers. In that case, the move could stoke tension with U.S. allies.

EU regulators have already cautioned that the Inflation Reduction Act — which has seen the federal government provide hundreds of billions of dollars in subsidies for green energy investment — amounts to global protectionism. Providing pharmaceutical companies with deep tax breaks and other incentives will only exacerbate these fears.

Paul Timmers has proposed an array of measures that Joe Biden’s administration needs to take to help quell tensions with the E.U. The Oxford University research fellow recommends that U.S. drug manufacturers coordinate early with partners, especially in the European Union.

Beyond that, Timmers suggests that industrial policy in the U.S. should be geared towards incentives that promote mutual investment and trade with allies and discourage subsidy races. A case in point is the $98.9 million funding that HHS recently granted to 59 Navigator organizations.

“The U.S. and the E.U. must see each other as strategic partners, not zero-sum competitors, in increasing global competitiveness and addressing global challenges,” added Timmers.

Addressing security concerns

The primary goal of the U.S. biotech policy is to tackle imminent security concerns — especially foreign rivals acquiring proprietary technology through both illegal and legal avenues and growing economic competition from China. This includes safeguarding the security of the biological data of American citizens.

Of course, Made-in-America fundamentals will continue to be the cornerstone of U.S. policy-making under President Joe Biden. According to Cornell University’s Tech Policy Institute director, Professor Sarah Krep, pretty much any federal funding initiatives directed at the biotech industry will likely be associated with policy changes like price lowering, as was the case with the recently enacted Chips Act.

If implemented, the proposal will undoubtedly help appease Big Pharma, which vehemently opposed the sweeping drug price-lowering regulation passed last year by the Biden-Harris administration.

The government’s move to lower drug prices irked pharmaceutical companies so much that PhRMA had to ramp up its lobbying spending to well over $300 million. It didn’t help that the new legislation would enable the federal government to negotiate prices directly with drug makers for some prescription medications.

Not just that, the Biden administration also made it clear that it was looking to rein in costs for Medicare, a big source of income for Big Pharma when targeting older adult consumers.

On their front, pharmaceutical lobby groups have argued that high drug prices are crucial to protecting proprietary technology so that Big Pharma can continue to make tangible investments in drug innovation. After all, the U.S. drug makers are responsible for two-thirds of pharmaceutical R&D spending.

Striking a subtle balance

Biotech and bio-manufacturing are no-brainer investment areas for U.S. stakeholders and the government. They have a pivotal role in the U.S. economy, with several leading biotech firms spearheading breakthroughs that can save uncountable lives.

Unfortunately, Big Pharma has been facing insurmountable hurdles, ranging from amplified competition from generics and patent expiration to skyrocketing drug prices. With the proposed tax reliefs and subsidies, the pharmaceutical industry could overcome some of these impediments and throw its weight on bio-manufacturing innovation.

However you look at it, U.S. policymakers must strike a subtle balance between the interests of the biotech industry and the broader public. The Biden-Harris administration needs to put on the front-burner policies that create more jobs, encourage manufacturing innovation, and enhance access to pocket-friendly healthcare.

Wrap-up 

PhRMA’s proposal for tax breaks and other incentives for drug makers to support the U.S. biotechnology industry is part of a broader push for increased domestic manufacturing capabilities and processes. However, the Biden administration must avoid fueling tensions with allies by avoiding subsidy races and focusing on incentives that encourage mutual trade and investment.

U.S. biotechnology policy aims to address security concerns, including economic competition from China and the acquisition of proprietary technologies by foreign adversaries through legal and illegal means. While the proposal can potentially increase U.S. competitiveness in the biotech industry, it remains to be seen whether or not the Biden administration will implement these tax breaks and subsidies.