American Industrial Opportunity Zones

Leveraging the 45X Production Tax Credit to Create Regional Communities of Engineering Practice

Too many people have argued away the strategic importance of manufacturing. And the solution has to involve reconstituting its communities of engineering practice that prioritize process knowledge.

Dan Wang, Breakneck

China’s Industrial Clusters

One of the clearest lessons from China’s industrial policy is the central role of communities of engineering practice—geographically dense clusters of competing manufacturers and suppliers that drive innovation. These clusters often emerged in Special Economic Zones or Free Trade Zones, where deregulated sandboxes allowed for concentrated investment and rapid growth.

“This approach has enabled even small villages in China to become globally competitive factories for a diverse set of products, such as¹:

• Guitars, Zheng’an county in Guizhou

• Lighters, Shaodong county in Hunan

• Synthetic diamonds, Zhecheng county in Henan

Most famously, China also successfully lured Tesla in 2018 to build a gigafactory in the Shanghai Free Trade Zone, which also hosts numerous domestic and foreign auto manufacturing plants in close proximity. Shenzhen offers another well-known example of rural farmland turned industrial powerhouse through deregulation and concentrated investment

China understands that industrial competitiveness depends on concentrated ecosystems of talent, capital, and process knowledge. U.S. industrial policy should reflect the same market-oriented logic.

How could the U.S. create similar communities of engineering practice that drive industrial innovation?

“Trickle Down Grants” Won’t Do the Trick

The Biden administration attempted to jumpstart regional industrial ecosystems through various “place-based” hub programs e.g. NSF Engines, Commerce EDA Tech Hubs, and various DOE energy hubs such as the Hydrogen Hubs and Direct Air Capture (DAC) Hubs.

The sheer number of programs alone conveys the serious bloat in U.S. industrial policy. Effectively coordinating overlapping programs across different agencies is also challenging. Why, for instance, did NSF designate Chicago as its quantum hub while Commerce chose Colorado and New Mexico? Indeed, the Biden DOE even recognized that industrial clusters often emerged organically through industry-driven site selection, despite over a dozen different grant programs across Commerce and DOE with various eligibility and timeline requirements.

These “trickle-down grants” have proven cumbersome and fragile. Large consortiums must spend months assembling applications and navigating permitting reviews. Agencies in Washington then devote enormous administrative bandwidth to evaluating proposals. Programs that fund physical infrastructure, such as Hydrogen and DAC Hubs, face federal permitting requirements triggered by grant funding.

Finally, the second Trump administration has demonstrated such grants, which can be canceled at will, do not have enduring political viability as a lever for industrial policy.

45X Industrial Clusters

A more scalable, politically resilient, and results-oriented approach to realizing U.S. industrial clusters is in modifying the 45X Production Tax Credit (PTC).

Unlike grants, the 45X PTC rewards actual production, not promises. It already covers solar, battery, wind, and power inverter component manufacturing, as well as critical mineral processing.² It survived the OBBA negotiations earlier this year essentially intact—and is already financing new factories.

Congress should authorize the Department of Energy, in coordination with the Department of Commerce’s Economic Development Administration and the IRS, to designate Industrial Opportunity Zones (IOZs) within 45X-eligible sectors. These IOZs would offer enhanced 45X benefits—such as increased credit value and extended phase-out—to any eligible manufacturing project within designated IOZs.³

For example, one emerging battery manufacturing cluster is the Atlanta-Athens-Augusta corridor. A battery manufacturing IOZ could increase the value of battery module, battery cell, and electrode active material manufacturing in designated census counties by 50% and extend the lifetime of 45X battery manufacturing provisions from beginning phase-out in 2030 to beginning phase-out in 2035.

Designating 45X Industrial Opportunity Zones

45X IOZs would not only accelerate formation of industrial clusters, it would also force regions and states to compete to demonstrate they are ready to receive and support billions of dollars of new manufacturing.

Federal agencies should assess regional proposals for IOZ designation on the following basis:

• Sufficiently skilled and educated manufacturing workforce

• Number and readiness of industrial sites e.g., graded, zoned, connected to power

• Streamlined state permitting processes to approve and permit projects in a timely manner

45X Expansion Pack

45X is already a bipartisan and popular provision. Authorizing 45X Industrial Opportunity Zones can be paired with other bipartisan bills expanding 45X to other technology areas introduced this session:

• Fusion Advanced Manufacturing Parity Act: Fusion components and expanded critical materials (note: includes rare earth magnets)

• CIRCUIT Act: distribution transformer production

A targeted 45X expansion to enable Industrial Opportunity Zones would align federal incentives with the creation of real communities of engineering practice and help American regions rebuild globally competitive industrial sectors.

1. These examples also chart a path forward for how American towns, particularly in the Midwest, have a viable path to reclaim their goods-producing role in a globally competitive market.

2. See here for a list of eligible components.

3. Unlike costly grant programs, 45X is fiscally lightweight. The original 45X tax credit, which supports manufacturing of components for solar, wind, batteries, inverters, and critical mineral processing across the entire country, was projected to cost $30B over 10 years. While the IOZs increase the value and lifetime of the credit within their regions, they represent only the most productive fraction of projects eligible for 45X.