Foxconn Deal Keeps Looking Worse

Wednesday, August 9, 2017 at 4:56 PM by

The massive subsides for Foxconn proposed by the Governor keep looking worse as we learn more. The most recent sobering information came this week when the Legislative Fiscal Bureau (LFB) issued a new analysis of the proposed subsidies. The figures in that August 8th analysis reinforce why a number of commentators and editors for business publications, including the editors of Bloomberg, have been extremely critical of the proposal.

Here are some of the key points in the new LFB review of the Foxconn bill:

  • Even under the best case scenario that 13,000 Foxconn jobs are created, plus 22,000 more from a multiplier effect, the Dept. of Administration (DOA) says it would take 25 years for increased state tax revenue to offset the cost of the state spending for the new tax credits – and that’s based on the unrealistic assumption that all the new jobs are taken by Wisconsin residents.
  • If one assumes that 10% of the new jobs are held by Illinois residents, the breakeven period under the best-case scenario is 27 years.
  • If the direct and indirect increases in employment are smaller, the LFB says the breakeven period could be significantly longer, although their analysis doesn’t specify the implications of alternative scenarios.
  • The cost of the proposed bill for state taxpayers would be $15.6 million in the current biennium and would jump to $522.7 million in the next biennium (2019-21).
  • If you factor in projected increases in state tax revenue resulting from the new jobs at Foxconn and from increased employment elsewhere (i.e., the multiplier effect), the net cost to taxpayers in the 2019-21 biennium would be $204 million lower, but would still come to a $307.6 million net expense, above and beyond the cost in the base year of the current biennium. (In other words, there would be a $307 million increase in the state’s structural deficit.)

A 27-year breakeven period that is based on the best case scenario for jobs should give pause to state policymakers who are considering placing such a huge bet on one employer. However, legislators and their constituents who would foot the bill for Foxconn need to be aware that there are a number of reasons why recouping the state costs will probably take far longer, if those costs are ever fully recovered. I say that for these reasons:

  • The breakeven calculations do not include any of the state’s costs for infrastructure or job training.
  • The state’s return on its investments in Foxconn will be much smaller and slower if Foxconn emphasizes state-of-the-art automation, rather than jobs. Our recent Wisconsin Budget Project report helps illustrate why less job creation raises the state cost per job and could make recovery of the state spending problematic. (One somewhat misleading aspect of much of the media reporting of the breakeven analysis is that it creates the impression that those calculations are from a Fiscal Bureau forecast. The breakeven timeline is actually a DOA analysis summarized by the LFB, and it’s based on an optimistic job creation scenario described by a consulting company hired by Foxconn.)
  • We can’t count on Foxconn maintaining operations in Wisconsin for long enough to pay off the huge state and local investments. As some commentators have noted, changes in technology or consumer demand could make the new facility unprofitable, and Foxconn could decide within 10 or 20 years to build a new plant in another state (offering new subsidies).
  • The DOA calculations have a methodological flaw common to many analyses that rely on positive multiplier effects. DOA tallied the positive effects of the new jobs created directly and indirectly, but it appears that they have ignored the effects of the jobs that will be lost when the $2.85 billion of state revenue is diverted from other uses. Although that sort of inconsistency is common, it’s a serious omission in an analysis that purports to calculate the net effects on future state tax revenue of a multi-billion state expenditure.

The more we have learned about the Foxconn deal, the more convinced I have become that the Bloomberg got it right in their August 3rd editorial:

“Such incentives are generally an awful way to lure jobs — expensive, inefficient and fraught with unintended consequences. They can prompt costly bidding wars between states and impede other budget priorities.  

…Wisconsin’s plan is likely to help a few people in an unpromising industry find temporary work before they’re displaced by technology — and to do so at the expense of everyone else in the state.”

Jon Peacock

One Response to “Foxconn Deal Keeps Looking Worse”

  1. […] are several problems with Wisconsin’s Foxconn deal, including its very significant cost, the lack of any mechanism at this point to claw back subsidies already paid out if Foxconn decides […]