Foxconn, pro and con

With a vote on the Foxconn incentive package reportedly set to take place today, the Wisconsin Policy Research Institute looks at the pros and cons of what is likely to be approved today:

Much of the discussion thus far about Foxconn Technology Group bringing an LCD screen manufacturing plant to southeastern Wisconsin has focused on the deal itself and the money that could flow out of — and eventually into — our state Capitol.

That’s important, and we synopsize the key numbers below. But the sheer size and scope of the deal raises unprecedented questions about everything from job creation and impacts on economic growth in the decades ahead to how free markets and economies work best, most fairly and efficiently, for everyone in the long term.

There are smart people coming down on both sides of this one, and the divergence of opinion stems at least partly from how far down the road (no, not just I-94, though that’s a question as well) one thinks he or she can clearly see.

As a key analysis of the deal by the nonpartisan Legislative Fiscal Bureau states, “Technological advances and changes in Foxconn’s market share, operating procedures or product mix could significantly affect employment and wages at the proposed facility over time.”

The impending legislative decision — the Assembly is expected to vote Thursday, but no vote has yet been scheduled in the Senate — will require peripheral vision as well, and that’s always the blurriest. Proponents call the deal “transformational.” Opponents worry about the precedent it would set and all the other roads and businesses that exist — or might want to — in other parts of our unique state.

To help shed light on a complex deliberation, we’ve asked three of the smartest economists in Wisconsin (or with Wisconsin roots) to share their thoughts prior to action in Madison. Their initial takes — one skeptical, one largely sanguine and one against — are summarized below, along with an analysis of the prospects for Taiwan-based Foxconn and LCD technology.

Why Wisconsinites should be skeptical by Andrew Hanson
Taxpayers should ask, “Is this a good deal for us?” Among the reasons why it’s not: The billions of state dollars could be used for economic development with a better track record, the economic-multiplier estimate for the Foxconn plant is extremely generous and the deal sets an ill-advised precedent for other large employers in Wisconsin.

Fiscal costs certain, but a potential for large gains by Noah Williams
The high upfront costs must be weighed against the potential that Foxconn may help Wisconsin develop as a hub of high-tech manufacturing, which could generate gains far beyond the direct jobs created.

There are better ways to create jobs and growth by Ike Brannon
Governments aren’t very good at figuring out which businesses are likely to grow and which are likely to fail. What governments can do is create an environment that’s conducive to small and medium-sized businesses to invest, grow and expand.

What will the future of LCDs mean for Wisconsin? by Robert S. Anthony
Will technology inside the plant be obsolete the day it opens? While Foxconn has shown itself to be a smart and agile company, its future here depends on how it reacts to the ever-evolving display industry.

Finally, we synopsize key points being made by Tim Sheehy, president of the Metropolitan Milwaukee Association of Commerce and, in the interest of full disclosure, a Wisconsin Policy Research Institute Board member.

Sheehy concedes that in general there is risk in granting individual corporate economic incentive packages in a market-based economy. But he argues that for most every state, incentives are a necessary tool in the competition for jobs and capital investment and asks, “What is Wisconsin supposed to do, disarm?”

The Legislative Fiscal Bureau memo, worth reading in its entirety, includes a wide variety of points:

• Foxconn agrees to build a $10 billion facility over six years and create up to 13,000 jobs, with a reported average salary of $53,875.

• The state will provide up to $3 billion through two types of tax credits (which can mean cash payments) and a construction sales tax exemption. Foxconn could be eligible for the maximum if employment reaches 13,000 positions by 2021 and remains at that level.

• A Foxconn payroll tax credit over 15 years would relate to any employee with wages of at least $30,000 and up to $100,000. It could amount to $1.5 billion.

• A Foxconn capital expenditures credit would be paid over seven years and could amount to $1.35 billion.

• It is believed that Foxconn would be able to claim the 7.5 percent manufacturing and agriculture credit.

• The bill would create a sales and use tax exemption. Based on estimated capital expenditures of $10 billion, Foxconn and its contractors would save $139 million. “However, since it is highly unlikely that Foxconn would locate in the state without the incentives provided under the bill, this amount should not be viewed as a state revenue loss,” notes the LFB analysis.

• The state could make up to $10 million in grants to local governments for development costs related to infrastructure and public safety.

• The bill would authorize $252 million in bonds for use in the I-94 North-South corridor project. If fully issued, estimated general fund-supported debt service payments on the bonds would be $408 million.

To estimate how long it will take for state government to recoup its investment, the LFB made a variety of assumptions. Much of the following is taken directly from the LFB analysis:

• Average annual employment of approximately 10,200 construction workers and equipment suppliers earning an average total compensation of approximately $59,600 (including benefits) per year during the four-year construction period.

• Nearly 6,000 indirect and induced jobs created during the construction period, with an average total compensation of $48,900.

• Indirect and induced construction-period jobs generating increased state tax revenues equal to approximately 6.3 percent of the additional gross wages.

• Indirect and induced jobs associated with the project totaling 22,000 beginning in 2021. Average annual wages for these individuals are estimated at approximately $51,000. Total ongoing wages are estimated at $1.12 billion annually, and related state taxes are estimated at $71 million per year. Smaller impacts are estimated in calendar years 2017 through 2020 as the project ramps up. (A new report paid for by the Wisconsin Economic Development Corp. adjusted job-creation estimates outside the plant, with fewer long-term jobs expected but more short-term jobs expected during construction.)

The LFB  analysis says: “Based on these figures, DOA projects that the cost of the refundable state tax credits under the bill will exceed the potential increased tax revenues until fiscal year 2032-’33. As of the end of that year, the cumulative net cost of the incentive package is estimated at $1.04 billion. Beginning in 2033-’34, payments to the company would cease and increased state tax collections are estimated at $115 million per year.

“DOA estimates that the project’s break-even point would occur during the 2042-’43 fiscal year.”

“It should be noted,” according to the LFB, “that the analysis focuses only on the impacts of the Foxconn project on the state treasury, but does not account for other benefits to the state’s economy and residents.” These include Foxconn’s $10 billion investment, employment opportunities for the state’s workforce and adding a new sector to Wisconsin’s manufacturing economy.

MMAC’s perspective

The Metropolitan Milwaukee Association of Commerce points to this bigger picture. MMAC says tax revenue is only one long-term measure — wages and benefits paid to Wisconsin workers during construction and during operation of the complex should also be considered.

• During construction: Based on a $10 billion capital investment, the project would create over 10,200 new jobs for prime and sub-contractors and equipment suppliers; over 1,700 jobs for suppliers and another 4,200 jobs that would result from new household expenditures — a total of over 16,200 jobs with $3.6 billion in labor income over the four-year construction period, according to an EY Quantitative Economics and Statistics analysis, paid for by Foxconn.

• During operation: If Foxconn employment reaches 13,000, the EY analysis projects over 11,400 jobs among suppliers. The household spending from those direct and indirect jobs would produce another 10,800 jobs. The total ongoing job impact could reach over 35,200 and total annual labor income of $2 billion, under those assumptions.

Ultimately, according to MMAC, a $10 billion Foxconn investment with 13,000 jobs could have a cumulative impact of $78 billion to Wisconsin’s gross domestic product over 15 years.

WPRI has an underlying and guiding belief in the efficacy and promise of free markets and limited government that allows the private sector to flourish. We espouse sound public policy that ensures opportunity and enables prosperity. Our function today — and in the weeks ahead — is to provide the best information possible to legislators, who are being asked to make one of the most important and impactful decisions of their careers. We urge them to consider all potential benefits and ramifications before voting.

These are legitimate points. An excerpt from Brannon:

In my first year as a professor at the University of Wisconsin-Oshkosh in the mid-1990s, I had a colleague who spent his summers consulting for a small tech firm with a couple hundred employees called Epic Systems. At the time, the state was vigorously giving subsidies to manufacturing companies to come to the state or not leave the state, while benignly ignoring companies like Epic.

Today, Verona-based Epic employs nearly 10,000 people, most of whom live and work in the state and most of whom have skilled, well-paying jobs that any state would kill to attract.

There are better ways to attract new jobs than to give billions of dollars to one large manufacturer. The state can do more to attract entrepreneurs.

A lower tax rate on businesses would be one way to do this. And doing more to encourage foreign-born students — who are much more likely to start businesses than U.S. born-students — to remain in Wisconsin would pay dividends in the long run, I believe.

Neither reform would produce immediate returns, but they would plant the seeds for the next Epic Systems and leave the state less dependent on the fortunes of one company or industry.

Brannon doesn’t point out that Epic is in Verona and not Madison, where it began, because Verona gave Epic tax incentives to move that Madison refused to give. Paul Soglin won’t mention that in his potential loss for governor.

Brannon is correct though naïve because he doesn’t mention how politics works. Encouraging foreign-born students to remain here misses the fact that the Trump administration is trying to slam the door on immigration. There is, sadly, no real support for severely reducing business taxes even in the supposedly pro-business GOP. When politicians feel they must make pledges of job creation to get and stay elected, well, that’s how we have the system we have today.

Illegitimate points are illustrated by Sen. Van Wangaard (R–Racine):

M.D. Kittle brings up an illegitimate issue brought up by opponents:

Opponents of Wisconsin’s potentially massive economic development deal with Foxconn Technology Group like to point to Pennsylvania’s tale of heartbreak at the hands of the Taiwanese tech giant.

That’s certainly how the Washington Post painted the picture earlier this year when Foxconn, in the first few weeks after President Trump’s inauguration, announced it plans to invest billions of dollars in the United States and create as many as 50,000 jobs.

In 2013, the post reported, Foxconn Chairman Terry Gou pledged to build a $30 million factory in Pennsylvania’s capital, Harrisburg, and hire 500 workers.

“But the factory was never built. The jobs never came,” the Post morbidly reported.

True. The deal didn’t go down.

But the story, and others like it, left out some very important details, according to a guy who has gotten to know Gou and Foxconn over the past several months: Gov. Scott Walker.

In a key way, Foxconn didn’t leave Pennsylvania; Pennsylvania left Foxconn, according to administration officials.

After Democrat Tom Wolf unseated Republican Gov. Tom Corbett in 2014, Foxconn saw the writing on the wall, Walker said.

“In the case of Pennsylvania, they changed leadership, they changed who the governor was,” Walker told MacIver News Service Tuesday on the Vicki McKenna Show, on NewsTalk 1130 WISN in Milwaukee.

“I jokingly, but only half jokingly, say, it’s probably a pretty good reason not to change who the governor is for the next few years,” Walker, who is expected to run in 2018 for a third term, added.

The Badger State’s proposed $3 billion incentives package would no doubt play a big part in sealing Foxconn’s plan to build a $10 billion high-tech manufacturing campus in southeast Wisconsin – a development project that could ultimately create 13,000 jobs at what would be Foxconn’s first North American manufacturing operation.

But Walker said Wisconsin offers Foxconn intangible benefits that other states cannot, chief among them, stability.

Pennsylvania Gov. Tom Wolf, billed as “The most liberal Governor in America,” brought into office an agenda of big tax increases and stiffer government regulations on business.

“The idea that the new governor, with new terms, a new potential business climate, might come in, was something that was a grave concern for (Foxconn), and so they backed away,” Walker said.

Foxconn, too, slowed its investment in Brazil, as the South American nation reeled under corruption and the impeachment and removal of its president.

That point, too, is not noted in the Washington Post story, which all but accuses Foxconn of being a deadbeat business. Foxconn, according to the newspaper, “spoke of a $10 billion plan in 2011” in Brazil.

“In Brazil, Foxconn has an iPhone factory, but its investment has fallen far short of expectations,” the Post reported.

Gou has made it clear that Foxconn needs to be in the United States. The proposed southeast Wisconsin operation would make super-high-definition liquid crystal display panels to be used in various industries. The United States remains the largest consumer market in the world, and “Made in the U.S.A.” is critical to Foxconn’s growth prospects, the chairman told the Milwaukee Journal Sentinel late last month.

Gou pointed to Wisconsin’s advantageous geographical location, its transportation and logistics strengths, and its vibrant university and technical college system. He said Wisconsin has the assets to again become a center of manufacturing.

“You have a good foundation,” he told the newspaper.

Walker said Foxconn wanted to be in the middle of the United States, near a major market like Chicago, “but not in the state of Illinois.”

“Rather, in a state like Wisconsin, where we balance budgets, we have a fully funded pension system, we have a rainy day fund that’s 165 times bigger than when we took office, we have a business climate that went from the bottom 10 to the top 10,” Walker said.

The Washington Post piece suggests Gou and Foxconn are nothing more than big corporate teases — that Pennsylvania isn’t the only state that has loved and lost a potential Foxconn development deal.

But, as Walker administration officials have pointed out in recent weeks, if Pennsylvania truly was broken-hearted about Foxconn’s departure, why was it so heavily courting the deal that Wisconsin appears to be on the brink of landing? Pennsylvania was noted as several states in the running for the Foxconn project.

What’s not been widely reported is the fact that Gou’s $10 million commitment to Carnegie Mellon University in Pittsburgh for robotics research didn’t end after the Pennsylvania economic development deal fell apart.

“Foxconn said its $10 million donation … was ‘moving forward very successfully,’ with half of the funds having been spent four years later,” the Washington Post reported.

Walker blames politics for the half-truths about Foxconn in Pennsylvania and elsewhere.

“As we know with other issues, there are some people who are so bothered by the idea that we might have success here, particularly because they somehow think it might be beneficial to me or to some future campaign,” the Republican governor said.

“The bottom line is this is just good for Wisconsin.”

The most important point to be made is that none of what is in the Foxconn package is money the state would have were it not for Foxconn. There would be no infrastructure spending and no tax breaks if Foxconn wasn’t coming to this state. This is money that does not exist right now.

 

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