Researchers at George Mason University say economic subsidies—such as the $3.6 billion in incentives promised to Taiwanese manufacturer Foxconn—only benefit corporations.
New evidence suggests the Foxconn deal in Wisconsin—which President Trump referred to as “one of the great deals, ever”—may ultimately not be a win for the state.
A recent study from George Mason University’s Mercatus Center found that the economic subsidies Wisconsin promised Foxconn Technology Group in an effort to lure the manufacturing giant to the Badger state could actually damage the state’s economy to the tune of tens of billions of dollars over the next 15 years.
The paper, which was published in November, offered an analysis of the economic case for and against targeted economic development subsidies using Wisconsin’s Foxconn subsidy package as a case study.
“The weight of economic theory suggests that these subsidies do not work and may even depress economic activity,” the study states.
These findings contradict former Wisconsin Gov. Scott Walker’s promise that the deal would bring jobs and economic growth to the state.
The Foxconn deal
In July 2017, Foxconn, a Taiwanese manufacturing company, announced it had reached a deal with the state of Wisconsin to open a production facility in Mount Pleasant, where it would manufacture large liquid crystal display (LCD) units.
The deal, spearheaded by Walker and backed by President Trump, was set to include $3 billion in subsidies for the company, which in return agreed to invest $10 billion locally and hire 13,000 workers.
After approving the initial tax break, Republican Assembly Speaker Robin Vos called the project an “American field of dreams.”
The incentive package, however, ballooned almost immediately and reached $3.6 billion by the time the final agreement was signed in November 2017. This includes $2.85 billion in refundable payroll and capital expenditure tax credits, which the study says are an “outright cash subsidy” since Wisconsin already exempts manufacturers from its corporate income tax.
The company will cash in on local subsidies, too.
Mount Pleasant and Racine County initially agreed to provide Foxconn with $764 million in subsidies—which has since grown to $911 million—with the state agreeing to underwrite 40 percent of these loans if the local government was unable to pay them off.
Mount Pleasant also declared 2,800 acres as “blighted” and the town and Racine County have borrowed about $350 million for infrastructure improvements and to purchase property using eminent domain in order to transfer it to Foxconn to build on.
The manufacturer, however, did not increase its investment in exchange for these higher subsidies. In fact, the company’s required investment actually decreased and Foxconn now only needs to invest $9 billion to receive the maximum amount of tax benefits.
Despite these changes, Walker and other supporters of the deal said it would be a win for Wisconsin and claimed incentives were necessary to attract businesses. They also argued that Foxconn’s presence would attract more businesses and create more jobs.
Opponents responded that the cost of the subsidies were likely to exceed any benefits felt by the state. Wisconsin’s own nonpartisan Legislative Fiscal Bureau estimated that even in a best-case scenario, the Foxconn plant investment would not break even until 2042.
In the two years since the deal was signed, FoxConn has repeatedly changed its plans for the Mount Pleasant facility.
The original plant was supposed to be a 20 million-square-foot factory for manufacturing large LCD screens, but Foxconn announced earlier this year that the plant would actually be much smaller and would instead design smaller screens for phones, smart watches, and tablets.
The company has also repeatedly fallen short of its job promises.
Current Wisconsin Gov. Tony Evers (D-WI) told CNBC in July that the plant, which is set to open in May 2020, will only employ 1,500 workers to start instead of the more than 1,800 Foxconn promised.
These changes threaten the company’s ability to obtain the full slate of credits. To receive the full $2.85 billion in tax credits, the company must create 13,000 full-time jobs averaging an annual salary of $53,875 a year and invest $9 billion in the Mount Pleasant campus.
If Foxconn doesn’t meet those hiring or investment targets, the company stands to lose out on substantial subsidies. In fact, it already has.
According to CNBC, Foxconn only hired 156 workers in 2018, missing its target of 260 workers and causing the company to lose out on $10 million in credits.
It’s unclear if Foxconn will meet its 2019 minimum of 520 employees, though the company appears confident it will. If it doesn’t, the company will forfeit up to $222 million. In 2020, the company needs to fill 1,820 new jobs in order to secure $270 million in subsidies.
It’s not entirely surprising that Foxconn is missing its hiring targets; a 2019 Wisconsin state audit found that, on average, companies receiving Wisconsin subsidies create only approximately 35 percent of promised jobs.
Even if the company does succeed and hire 13,000 full-time workers as promised, the state would still have spent more than $219,000 to create each job.
“There’s no way this will ever pay itself off,” Tim Bartik, a senior economist at the W.E. Upjohn Institute for Employment Research, told Bloomberg earlier this year. Bartik said Foxconn’s incentives are more than 10 times greater than typical government aid packages of its stripe.
In his own interview with Bloomberg, Evers said he will push for more transparency to hold the company accountable to its promises, but admitted his powers are limited. Shortly before Evers took office in January, the Republican-controlled legislature passed a series of rules making it harder for him to back out of the Foxconn deal.
Neither Foxconn nor Evers responded to requests for comment for this story.
The ineffectiveness of subsidies
The findings of the Mercatus Center report appear to line up with criticisms of the deal.
By funneling subsidies to Foxconn, the report argues, the state is effectively raising taxes for other individuals or businesses, or reducing investment in public services, which discourages economic activity in other parts of the company.
The authors also pour cold water on the notion that the presence of Foxconn will spur additional growth in Wisconsin’s manufacturing sector.
“If, however, Wisconsin were already well suited to the tech manufacturing sector, then Foxconn would need no inducement to locate there in the first place,” they write.
The report concludes decisively that subsidies are not effective at spurring economic activity.
“Using Wisconsin’s Foxconn subsidies as an example, we have shown that under most plausible scenarios, the taxes funding the subsidies will discourage more economic activity than will be encouraged by the subsidies themselves,” the paper states. “In short, the net effect of targeted economic development subsidies is likely to be negative.”
Earlier this month, Wisconsin Department of Safety and Professional Services Secretary-designee Dawn Crim toured the Foxconn site in Mount Pleasant, conducting her second routine inspection of the facility.
“From everything I’ve seen and heard, things are moving along without hassle or delay, and our agency has been accessible and responsive to our customers and partners.” Crim said in a statement. “There is evident progress since the summer when I observed foundation work on the fabrication building. Everyone is putting their best foot forward, and everyone is working hard to make this a successful project for the region and state.”
While construction is moving forward, it remains to be seen whether Foxconn ultimately lives up to the terms of the full deal.
For its part, Foxconn continues to paint a rosy picture of the deal. On Dec. 6, Foxconn founder and former chairman Terry Gou attended the company’s holiday celebration in Milwaukee, where he spoke about the company’s future in the state.
“I’m committed to Wisconsin,” Gou said.