Foxconn cashes in for $3 billion-plus: Analysis

Foxconn hit the jackpot with Wisconsin on Wednesday, when CEO Terry Gou and Governor Scott Walker signed a memorandum of understanding for the company to invest $10 billion in southeastern Wisconsin in return for $3 billion in state subsidies and an undetermined amount of local incentives in the form of tax increment(al) financing (TIF).*

The basic outline of the deal, sent to me by John Haynes of the Milwaukee Journal-Sentinel, is pretty simple: Foxconn is required to invest $10 billion and employ 13,000 workers within six years at an average pay rate of $53,875 a year plus benefits. In return, the state will give Foxconn $1.5 billion in tax credits for the 13,000 new jobs, $1.35 in tax credits for the $10 billion investment, and $150 million in sales tax breaks on construction materials for the plant. The tax credits are refundable, so Foxconn will receive a check if it doesn’t owe much or anything in state income tax in any given year. The state credits will total $200-$250 million a year for up to 15 years, or until Foxconn has received the entire $3 billion. All this must be approved by the state legislature by September 30. According to the state, if Foxconn does not create all the jobs or make the entire investment, it does not get the full subsidy.

In addition, the legislature must also amend the state’s TIF law by lifting the 12% cap on the ratio of TIF’d property value to a municipality’s total property value, and extending the allowable life of TIF bonds. Together, these would make larger TIFs and greater municipal debt possible. It is unclear exactly how much more this will add to the subsidy package, since a final site hasn’t been chosen in the Kenosha-Racine area. But Kansas City has certainly managed to give hundreds of millions of TIF dollars to companies in the past, so a large local component to the incentives package is certainly possible.

Is this a good deal for Wisconsin? As the state’s press release points out, it’s better than the deals Boeing has gotten in Washington state, including a much lower cost per job — but that’s a pretty low bar. As I discussed last time, Foxconn wanted desperately to locate in the United States due to its fear of U.S. protectionism, so the country as a whole was actually in a very strong bargaining position. However, the possibility of a bidding war between different states negated this, even though the individual states (Wisconsin at 3.1%) had very low unemployment rates and thus greater bargaining power than otherwise. Without EU-style rules to restrict bidding wars, there was a high probability of Foxconn hitting the jackpot.

With EU-type rules, it would be impossible to give a $3 billion investment incentive, since $9.9 billion of the $10 billion would only be eligible for 34% of any region’s maximum aid intensity. The maximum conceivable subsidy would be a little over $1 billion.** We might say this consideration is the high bar, but it’s worth knowing what is already achievable with a different set of rules.

On a strict cost basis, if the deal works out as claimed, you still have a cost per job of $231,000 and an aid intensity of 30%. These would be normal numbers for an automobile assembly plant, but Foxconn will only be paying a tiny bit over the Wisconsin average wage, certainly less than auto assembly pays. So these are basically just average jobs getting a lot of money. Many average jobs, certainly, but there is a good argument that you have diminishing returns. The more jobs there are, the more pressure that gets put on schools and infrastructure as people move to southeast Wisconsin, and the greater the number of jobs that will likely go to Illinois residents (indeed, Greg LeRoy of Good Jobs First says Illinois is the biggest winner of this deal after Foxconn itself). So you really shouldn’t be spending 10 times the incentive dollars for 10 times the jobs.

What seems worst to me is that not only did Foxconn definitely need to be in the United States, but it probably wanted to locate in the Congressional District of House Speaker Paul Ryan all along. This was a very short bidding war. Wisconsin municipal officials were only notified about two months ago, and we have seen no stories about competing bids, nothing about other governors making a pilgrimage to Asia. This seems like it was never much of a competition. If that’s true, Wisconsin got taken to the cleaners. Even if there was a genuine competition, the deal was way too rich.

 

* In Wisconsin and a few other states, the program is known as tax incremental financing, but in most of the country, it is simply tax increment financing.

** According to EU rules, the maximum aid intensity of 50% of investment is only allowable in regions with less than 45% of EU average per capita income. These areas are unlikely to be the site of an advanced manufacturing facility. The next highest maximum is 35% (down from 40%, such as Dresden, Germany, which has quite a bit of high-level manufacturing, such as microchip fabrication), and 34% of that is 11.9%. 11.9% of $10 billion is obviously $1.19 billion, which is why I say the maximum conceivable subsidy is just over $1 billion, and $3 billion is simply impossible under these rules.

Cross-posted from Middle Class Political Economist.

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