Foxconn deal: Unprecedented decision, disparate opinions

By MIKE NICHOLS | Aug. 16, 2017

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 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.

Mike Nichols is WPRI president.