To boost arms production, Pentagon calls for tax breaks, fewer rules for contractors

By Mike Stone

WASHINGTON (Reuters) - The Pentagon said defense contractors may need tax breaks, fewer regulations and long-term contracts as incentives to boost weapons production to create much bigger stockpiles, according to a Department of Defense strategy released on Thursday.

The 60-page policy document takes lessons from a wide range of conflicts, including Russia's invasion of Ukraine, and establishes a starting point to begin asking Congress and defense giants how they can fund and create items like ammunition and rockets in much greater volumes over a shorter period of time.

The first ever National Defense Industrial Strategy calls for investment, production and capacity increases and greater cooperation with allies to boost weapons production across the spectrum from hypersonic weapons to cyber tools and artillery.

It recommends Congress explore a list of actions like tax incentives, regulatory relief and long-term contracts "aimed specifically at building and maintaining spare production capacity."

Increased production coupled with tax breaks would underpin already strong defense company earnings.

Top contractors Lockheed Martin, General Dynamics, Northrop Grumman and L3Harris Technologies reported better-than-expected earnings last quarter, and executives expect both the conflict in Ukraine and Israel's war with Palestinian militant group Hamas to drive up near-term demand.

Drawing from recent history, the Russian invasion of Ukraine has shown the Pentagon that existing defense industrial capacity to rapidly replace weapons is lacking and "has had to expand rapidly to replace spent stocks in a suitable timeframe."

For example the U.S. Army has said it needs Congress to approve $3.1 billion to buy 155-millimeter (6-inch) artillery rounds and expand production to quickly replace stocks depleted by shipments to Ukraine and now Israel.

The report says working with allies to make more weapons abroad by "developing, growing, and sustaining multiple, redundant, production lines across a consortium of like-minded nations is imperative."

The U.S. has said it will help Australia produce guided multiple-launch rocket systems by 2025 after top officials pledged to engage with China but also oppose it if needed.

The strategy paper advocates "destigmatizing" blue collar jobs, reaching out to industry that has not traditionally sold products to the Pentagon, and investing in spare production capacity.

(Reporting by Mike Stone in Washington; Editing by Sonali Paul)