Wisconsin goes big to lure a factory. Critics say it doesn’t make sense.

Tax breaks worth $3 billion draw a giant Foxconn plant for up to 13,000 workers to make display screens. But economists question the math of an arms race for jobs, and say it advantages big firms at the expense of startups.

Mark Hoffman/Milwaukee Journal-Sentinel/AP
Incentives for Taiwan-based Foxconn Technology Group are discussed in the Assembly Committee on Jobs and Economy on Aug. 3 at the state Capitol in Madison, Wis. The company says it plans to build a liquid crystal display panel factory in southeast Wisconsin, under a deal with $3 billion in tax breaks.

If all goes to plan, a giant Taiwanese-owned electronics factory will break ground next year in southeastern Wisconsin. The $10 billion plant is supersized: at 20 million square feet, it would be five times the size of Boeing’s main plant in Everett, Wash., and would employ up to 13,000 workers to make screens for devices used in homes, cars, and hospitals.

Equally supersized is the incentives package that Wisconsin is offering to Foxconn Technology Group to build its first US plant there. With $3 billion in tax breaks, the package is reportedly the most generous ever awarded to a foreign investor. It has stirred controversy in Wisconsin where lawmakers voted last week along largely partisan lines to approve it.

Foxconn, which makes iPhones and other devices for Apple, among other tech brands, isn’t alone in seeking out favorable terms from local officials. Amazon recently lit a fuse among big cities by soliciting offers for a new North American site to rival its headquarters in Seattle. Several states are vying for a $1.6 billion auto plant to be built by Toyota and Mazda, with the promise of 4,000 direct hires.

Mark Hoffman/Milwaukee Journal-Sentinel/AP
Department of Administration Secretary Scott Neitzel (2nd l.) speaks about the incentive deal for Taiwan-based Foxconn Technology Group before the Assembly Committee on Jobs and Economy on Aug. 3 at the state Capitol in Madison, Wis.

At a time of anxiety over well-paying jobs, states and cities are upping the ante in cutting deals with corporations, a trend that both reflects and reinforces the concentration of market power in many industries. While states have always competed for investment, the tax incentives offered have grown increasingly more generous, raising questions about the viability of such giveaways and the tilting of the playing field in the direction of giant companies like Amazon.

Erode the economy’s dynamism? 

Tim Bartik, an economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich., has compared the incentives provided to firms in 45 industries that account for over 90 percent of total employment. He found that between 1990 and 2015 local and state governments more than tripled the tax breaks they offered to businesses, from 9 percent of gross taxes to 30 percent. The average job created was subsidized to the tune of $2,400 a year – and the Foxconn deal would take that to $15,000 or more.

When it comes to giant corporations like Foxconn and Amazon, their demands for much larger subsidies for job creation could be corrosive for an economy in which rates of business dynamism – the seeding of new companies, the death of old ones – are waning. “There’s a concern that you end up with a system where a lot of money is funneled to a few large firms, and then what effect does that have nationally?” says Mr. Bartik.

Like many economists across the political spectrum, he’s skeptical that most incentive packages make sense for taxpayers, given the mixed evidence of efficacy. “It’s hard to come up with real economic rationale for why the subsidy per job should be so high,” he says.

The political stakes

The political rationale is clearer: President Trump has called for a revival of manufacturing in the United States and browbeaten companies, foreign and domestic, that don’t comply. In July he announced the Foxconn deal at the White House, alongside Foxconn chairman Terry Gou and House Speaker Paul Ryan, in whose district the plant is to be located. Mr. Trump took credit for persuading the company to build a US plant. “If I didn’t get elected, he wouldn’t be spending $10 billion,” Trump said of Mr. Gou.

This claim cuts both ways. Foxconn may be motivated by fears that Trump’s protectionist views could choke future exports from China, so that a US production facility represents a hedge. In his campaign, Trump railed against Apple for making its products overseas.

Wisconsin Gov. Scott Walker, a Republican, has hailed Foxconn’s decision as a bet on Wisconsin as a world-class manufacturing base. His administration points to the supply chain required to produce the display screens and the number of indirect jobs created to justify the generous tax breaks, which the legislature’s nonpartisan audit agency estimated would take at least 25 years to recoup, based on projected tax revenues.

“We see this as an investment that’s going to pay dividends for generations. This is not a 10-year deal or a 20-year-deal or even a 30-year deal. This is a transformational deal that’s going to change the economy of Wisconsin,” says Mark Maley, a spokesperson for the Wisconsin Economic Development Corporation (WEDC), which is negotiating the terms of Foxconn’s deal.

In China, Foxconn’s plants employ hundreds of thousands of workers, often housed on-site. Any US plant is likely to be much more automated, given higher labor costs and the pace of innovation in electronics production. That has raised doubts over Governor Walker’s target of 13,000 jobs; Foxconn initially said it planned to hire 3,000 workers in Wisconsin.

These workers can expect an average salary of $53,875, plus benefits, according to WEDC. By local standards, that’s a decent wage, and in a state with 3.2 percent unemployment is likely to pull in workers from neighboring Illinois that lies south along an interstate due for upgrades.

But Gordon Hintz, a Democratic state representative who voted against the incentives bill, points out that the estimated median salary at Foxconn is closer to $41,000, or roughly $20 an hour. Finding workers at this wage will be harder.

“This seems like a desperate attempt by a governor whose economic track record has been pretty lousy so far. The governor needs it because he’s up for reelection [in 2018] but the taxpayers don’t,” he says.

Spinoff potential, but also risks

A giant electronics plant that used robots for assembly could still be a boost for Wisconsin since its homegrown machinery firms are moving into this space, says John Torinus, an entrepreneur and chairman of Serigraph, a maker of graphics parts in West Bend, Wis.

He still has questions about the final terms of the deal and its liabilities. But on balance he sees it as an opportunity for Wisconsin. “It’s a big price to pay, but sometimes you gotta make some big bets. Big bets, big reward,” he says.  

In addition to $3 billion in tax credits, lawmakers last week agreed to exempt Foxconn from state environmental regulations and to suspend any adverse court rulings until the state’s business-friendly Supreme Court heard expedited appeals. Lawyers working for the legislature have warned this may be unconstitutional.  

Opponents have also raised doubts over the math used to justify Foxconn’s tax credits. The audit bureau’s forecast of a 2041 break-even failed to discount the future value of revenues and didn’t consider alternative scenarios, says Kathleen Vinehout, a Democratic state Senator who wants to run against Walker in 2018. “This was extremely optimistic,” she says. “This is what farmers mean by ‘a pig in a poke.’ ”

Yet another concern is more basic: Will Foxconn actually deliver? The company has signed agreements in several countries, from Brazil to Indonesia to Vietnam, to build large plants employing huge numbers of workers, only to scale down its investment or pull out altogether. In 2013, it announced a $30 million manufacturing facility in Harrisburg, Pa. None materialized.

If so, Wisconsin will have to fall back on job creation based on the companies it has, and the future startups that it needs to nurture, says Senator Vinehout. “Our dollars are much better spent on entrepreneurship and growing our own companies.”

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