Wisconsin's Path To Making Good On A $3 Billion Foxconn Investment

Incentives For Electronics Manufacturer Don't Ensure Long-Term Commitment
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Photo of image by Ervins Strauhmanis (CC BY 2.0)

Wisconsin's bet on a proposed electronics factory is of a kind and scale not seen before in the state's economic development efforts. As the Wisconsin Assembly signed off on a $3 billion incentives package for Taiwan-based manufacturer Foxconn, debate continued as to when or even if the state would make that investment back.

An analysis from the non-partisan Legislative Fiscal Bureau estimated that it would take the state until 2043 to break even on the deal, with tax revenues resulting from the project catching up to the state's initial outlay. That projection has not swayed Republican support for the bill.

Gov. Scott Walker dismissed concerns around the analysis because it didn't account for benefits to the state beyond tax revenues. Even Assembly Minority Leader Rep. Peter Barca, D-Kensosha, who initially stated he was "extremely concerned" about the LFB analysis' implications, ended up voting in favor of the deal.

These projections all hinge on what one assumes about the Foxconn deal. Walker's argument in favor of it has touted the highest numbers. The governor has repeatedly said Foxconn will create 13,000 new jobs, though the state's memorandum of understanding with the company says the deal will create "up to 13,000 jobs," meaning that number is at the high end of a range of possible job numbers. The LFB report assumes that Foxconn will ramp up to that level of hiring by 2021, and also factors in 22,000 other jobs outside the plant but related to its operations.

But beyond how many people Foxconn actually hires and what they get paid, all kinds of other assumptions come into play. How long will the factory's LCD screens stay competitive on the market? How much will the plant rely on automation as opposed to human labor? How many of the plant's employees will live in Wisconsin, and how many will live in Illinois should the facility be located near Racine and Kenosha? How many Foxconn-related businesses will spring up on either side of the state line?

Additionally, not all the state's incentives are tied to job creation. Wisconsin has agreed to pay for 17 percent of Foxconn's payroll but also 15 percent of its capital investment, which means the company could still walk away with a healthy chunk of the original incentives package even if job creation falls short of the target.

The Wisconsin Budget Project, a non-partisan non-profit, tries out a number of different assumptions about such variables in an analysis released in mid-August. The report's summary suggests the LFB projection is too rosy: "It may be wishful thinking to believe that the huge subsidies Wisconsin lawmakers have proposed granting to Foxconn would be offset by increased tax revenue by 2043".

In fact, the Wisconsin Budget Project analysis used many of the same parameters as the LFB report, but looked at possible scenarios in which Foxconn ended up hiring far fewer than 13,000 people. In one scenario in the non-profit's analysis, Foxconn hired 6,500 people, and in another, the lower target of 3,000. These scenarios also factored in new jobs indirectly related to Foxconn, which would of course fall or rise along with the company's own hires. These scenarios would move the break-even date back to 2050 and 2058, respectively.

In an August 18, 2017 interview with Wisconsin Public Television's Here & Now, Wisconsin Budget Project director Jon Peacock offered some perspective on one of the most common criticisms of the deal — that Illinois is paying nothing for the incentives, but would benefit from a massive new manufacturing operation just north of the state line. The Wisconsin Department of Revenue would be able to collect state income tax from Illinoisans commuting to work at the factory, he said. However, that won't be the case for out-of-state workers who benefit indirectly from the plant.

"Most of the jobs [related to Foxconn] are going to be with [outside] suppliers and many of them will be in Illinois, and those workers at those supply companies, their income will be taxed in Illinois," Peacock said. "So we assumed, pretty conservatively, that five to 10 percent of the new tax revenue would end up in Illinois' coffers, not Wisconsin's, and that lengthens the payback period."

When it comes to employment at the factory itself, the use of more automation effectively could cost the state more per job. This risk is because of the dual structure of the incentives — with one part tied to payroll and the other to capital investment.

The Wisconsin Budget Project detailed the implications of this possibility in another report issued in early August, essentially arguing that the capital incentives could encourage the company to invest heavily in robotics and less so in hiring people. More automation wouldn't necessarily mean less demand for supplies from ancillary businesses, but it would mean fewer wages flowing from the factory to spur other economic activity in southeastern Wisconsin and northern Illinois.

"We were essentially assuming in our two scenarios, quite a bit of automation and the use of robotics," Peacock told Here & Now. "We assumed that they would spend at least $9 billion in capital investments and qualify for the maximum amount of credits of that side, but we just varied the number of people they'd be employing."

Like other observers, Peacock raised the fact that Foxconn makes products for a technology market that's always changing rapidly, churning out consumer gadgets that can go from coveted to obsolete in just a few years. That dynamic points to the possibility that a Foxconn LCD plant could be out-of-date as early as sometime in the 2030s and leave the subsidies uncompensated.

In its analysis, the Wisconsin Budget Project looked in particular at the year 2034, which is when the state will stop sending Foxconn payments toward the incentives under the current deal. Even if the plant created 13,000 jobs between 2021 and 2034, a 2034 departure would cost the state nearly $1 billion, according to the analysis. In any case, Peacock cautioned against assuming that $3 billion in incentives will ensure a truly long-term commitment from Foxconn.

"Foxconn could leave the state within 10 or 20 years," Peacock said.

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