Maximizing CHIPS Subsidy Benefits for Workers — Not CEOs

More than 70 Analog Devices employees recently delivered a petition to top executives demanding better pay and working conditions. They pointed out that while workers were suffering unpaid shutdowns and delays of scheduled raises, the company had continued to reward executives and shareholders with billions in stock buyback spending. Among their key demands: a $27 minimum hourly wage, no unpaid shutdowns or forced vacations, and improved training for handling dangerous chemicals.

Background on the stock buyback provisions in CHIPS 

The bipartisan CHIPS and Science Act, signed into law on August 9, 2022, forbids semiconductor subsidy recipients from spending CHIPS funds on stock buybacks or shareholder dividends. Since money is fungible, some Democratic lawmakers have urged the agency responsible for administering the program, the Department of Commerce, to go further to prevent CHIPS funds from enabling stock buybacks.

In a public webinar, Congressional Progressive Caucus Chair Pramila Jayapal recounted “deep and frequent negotiations” with Commerce Secretary Gina Raimondo, which started in July 2022, as the CHIPS Act was heading towards passage. These negotiations focused on ensuring that the new funds would go towards “an industrial strategy of revitalizing domestic manufacturing, creating good-paying American jobs, strengthening American supply chains, and accelerating the industries of the future rather than that money going directly into the pockets of CEOs and Wall Street traders,” Jayapal explained.

Senator Elizabeth Warren has also initiated a series of letters to Secretary Raimondo urging stronger action on stock buybacks. “Without strict controls, we are concerned that CHIPS funding may result in a subsidy for additional buybacks, enriching executives and stockholders at taxpayers’ expense while undermining the goals of the legislation,” read one joint letter from Warren, Jayapal, and several other Democrats in October 2022.

Protecting taxpayers and “realizing the economic and national security objectives of the CHIPS Act will require the Department [of Commerce] to use its authority to ensure that CHIPS funds are not used to subsidize stock buybacks and shareholder distributions, whether directly or indirectly,” read another joint letter from four senators and four House members.

In February 2023, Commerce released CHIPS subsidy criteria requiring all applicants to detail their intentions with respect to stock buybacks over five years and promising preferential treatment in the awarding of grants to firms that commit to refrain from all stock buybacks.

“This is about enhancing research and development in America,” Raimondo explained in an interview. “The money should be used to expand in America, to out-innovate the rest of the world. Invest in R&D and your workforce, not in buybacks.”

While encouraged by the Commerce Department’s precedent-setting policy on buybacks, Jayapal cautioned that “it’s going to be on us all collectively to make sure that this is the direction we continue to follow and that things don’t start to fall through the cracks. That’s all about implementation…We need to engage to make sure that public money is used for public good.”

CHIPS provisions emerged out of growing criticism of stock buyback spending

Stock buybacks were largely considered unlawful stock market manipulation until 1982, when the Securities and Exchange Commission (SEC) created a massive safe harbor from liability. In recent years, particularly since the 2017 corporate tax cuts, buyback spending has exploded. S&P 500 firms alone spent $806 billion on buybacks in the first year after that tax reform, a massive jump from the $519 billion they spent repurchasing stock in 2017. While buybacks dipped in 2023 due to recession concerns, Goldman Sachs analysts expect a sharp uptick this year and a historic outlay of more than $1 trillion in 2025.

In the midst of this boom, buybacks have come under much greater scrutiny than ever before. Analysts have documented the association between buybacks and reduced capital investment and innovation, wage stagnation, and worker layoffs. In response, policymakers have pursued various mechanisms for discouraging this financial maneuver:

• The 2020 CARES Act imposed a temporary ban on stock buybacks on airlines and other companies receiving pandemic financial aid. This ban was part of a Payroll Support Program secured by aviation labor unions, along with anti-layoff protections and executive compensation restrictions that expired in September 2022.
• The 2022 Inflation Reduction Act introduced a 1 percent excise tax on the repurchase of corporate stock. President Biden has proposed quadrupling this excise tax and a Senate bill, the Stock Buyback Accountability Act ( 413), would achieve this.
• In 2023, the SEC issued a new regulation requiring companies to provide much more detail about their buyback activity, including whether top executives bought or sold company shares during the four days before or after a buyback announcement. Even though designed to simply provide investors with basic information about this rampant yet opaque practice, the Fifth Circuit Court of Appeals struck down the rule following a Chamber of Commerce lawsuit. A bipartisan letter by Senators Tammy Baldwin and Marco Rubio calls on the SEC to re-propose the rule, as does a coalition letter that includes various labor unions as signatories.
• Biden has also included a proposal in his federal budget that would ban top executives from selling their personal stock for a multi-year period after a buyback, preventing CEOs from timing share repurchases to cash in personally on a short-term price pop they themselves artificially created. A Senate bill, the ALIGN Act ( 790), would ban executives from selling their shares within a year of a stock buyback announcement.
• The Reward Work Act (HR 3694) would institute a general ban on stock buybacks in the open market, which would largely return us to the pre-1982 status quo.

Conclusion and recommendations

The CHIPS for America program is a key pillar of President Biden’s economic agenda, along with the historic and complementary programs the administration is implementing through the Inflation Reduction Act and the Bipartisan Infrastructure Investment and Jobs Act to strengthen public infrastructure and accelerate the transition to a clean energy economy.

As the administration has stated, the goals of this economic plan are to “invest in America, stimulate private sector investment, create good-paying jobs, make more in the United States, and revitalize communities left behind.”

The likelihood of achieving these goals will be far greater if corporations receiving public investment dollars shift away from the all-too-common focus on short-term payouts for top executives and wealthy shareholders and instead focus on building strong workforces and creating long-term value.

The administration has taken many important steps to use the power of the public purse to push corporations in this positive direction. For instance, President Biden lifted the wage floor for certain federal contract workers to $15 per hour. And he has ordered construction firms involved in large public infrastructure projects to negotiate collective agreements with their workers.

With regard to the CHIPS program, the administration took the important step of requiring corporations receiving more than $150 million in subsidies to submit plans to provide affordable, high-quality child care services for their manufacturing and construction workers. If effectively implemented, this will help reduce barriers to semiconductor jobs for people who are underrepresented in the sector, including women. Century Foundation experts have been monitoring companies in line to receive CHIPS grants and are seeing some hopeful signs that firms are engaging with communities to develop good plans for their employees without contributing to rising costs for other households.

Strong stock buyback restrictions on corporations receiving federal subsidies and contracts would reinforce the administration’s economic agenda, since every dollar spent on buybacks is a dollar not spent on employee child care subsidies, worker wages and training, or innovation for long-term competitiveness.

The administration’s decision to provide preferential treatment to CHIPS grantees that agree to forgo buybacks was a positive step. However, as Senator Warren, Representative Jayapal, and other members of Congress pointed out in a recent letter to Commerce Secretary Raimondo, the agency’s guidance for grant applicants continues to “leave the door open for semiconductor companies to take millions or even billions in CHIPS grants, move some money around, and then engage in more stock buybacks.”

To maximize the benefits of this program, the Department of Commerce should take advantage of its statutory authority to fully ban CHIPS grant recipients from engaging in stock buybacks as a condition of their awards. Agreements should also include strong accountability measures if grant recipients engage in stock buybacks in violation of the ban.

As semiconductor corporations have been competing for this funding in recent months, they appear to have been holding back on buyback activity – likely hoping to avoid drawing greater scrutiny of this wasteful practice. But if contracts do not include strong teeth to reinforce the administration’s position, the buyback floodgates could open once again.

Pdf version of this report.