Foxconn likely will be a drag on Wisconsin economy, market-oriented researchers suggest

Rick Romell | Milwaukee Journal Sentinel

Widely criticized by many on the left, Wisconsin’s deal with Foxconn Technology Group is now also under fire from the right side of the political spectrum.

A recent analysis published by the Mercatus Center at George Mason University suggests that the Foxconn development – considering costs as well as benefits -- is likely to end up being a net loss to Wisconsin’s economy.

“It wasn’t really talked about as a gamble but that’s really what it is,” said Matthew Mitchell, senior research fellow at Mercatus and the lead author of the study. “Anytime you do something like this you’re really trying to make a bet. And the risk factor here was not really emphasized.”

The analysis by Mitchell and his colleagues contains assumptions and contingencies: How important was Wisconsin’s subsidy offer in Foxconn’s decision to locate here? How much will Foxconn spend on its planned flat-screen factory?

Flying over the Foxconn site Check out the recent progress being made at the Foxconn site in Mount Pleasant.

But overall, the authors say the “most realistic range of estimates” indicates the Foxconn deal for the plant the company now is building will end up costing Wisconsin’s economy $1.2 billion to $6.0 billion over 15 years.

That would shave somewhere between two-hundredths of a percent to about one-tenth of a percent off what the authors estimate the state’s gross domestic product will total over the period.

A key takeaway, according to Mitchell: Descriptions of the economic effects of targeted incentives such as those Foxconn stands to receive typically lack context.

“They tend to, I think, dramatically overestimate the benefits from subsidies (and) they completely ignore the costs,” he said.

While the Foxconn deal has been sharply criticized by many as an extreme example of corporate welfare, Mitchell and his colleagues are hardly coming at their research from the left. The Mercatus Center is a market-oriented think tank with connections to the billionaire Koch family.

But criticism of targeted economic incentives “brings together interesting ideological…bedfellows,” Mitchell said.

“If you’re a free market person there’s reason to oppose favoritism on the grounds that it messes with the market process,” he said. “And if you’re a progressive there’s reason to oppose it because it favors the wealthy and well-connected at the expense of the poor and the unknown.”

With then-Gov. Scott Walker backing the package, the Legislature in 2017 approved up to $3 billion in special tax credits intended to spur Foxconn to build a $10 billion flat-screen manufacturing complex and create 13,000 Wisconsin jobs. Given the state’s tax policies for manufacturing, the vast majority of the credits actually are likely to be cash payments.

Foxconn has stuck by its 13,000-jobs pledge, but whether the firm ultimately captures anything close to the $3 billion is open to question. The initial deal envisioned that the company would build the largest and costliest type of flat-screen plant currently constructed, but Foxconn has scaled back those plans and now is building a significantly smaller factory in Mount Pleasant.

The Mercatus study estimates the costs and benefits of the larger, so-called Generation 10.5 plant, but the researchers also reduced those numbers to arrive at estimates for the smaller, Generation 6 factory Foxconn is actually building.

The costs, as the Mercatus study estimates them, stem from the fact that money going to Foxconn will mean less money for Wisconsin taxpayers to use to create demand for other goods and services.

Instead of subsidizing Foxconn, the study says, the state could have, say, reduced its corporate income tax rate or lowered its sales tax. That would give businesses or consumers more money to plow back into the economy.

For their estimate of Foxconn’s economic benefits, the Mercatus study drew on a 2017 analysis by Noah Williams, a University of Wisconsin-Madison economics professor – and once an adviser to Walker’s short-lived presidential campaign.

Williams had calculated the additional economic output of a Generation 10.5 plant – the only thing publicly known to be on the table at that time. The Mercatus researchers used that estimate, and another, smaller estimate for the output of a smaller Generation 6 factory.

But, importantly, they say the most realistic calculation of the benefit in either case should be sharply reduced. That, they say, is because other research suggests that less than one in four companies offered incentives decide to locate somewhere because of the subsidy.

In other words, they say that for any given company offered incentives, odds are 75% or higher it would have chosen the same place even without the incentives.

Apply that reasoning to Foxconn, subtract the opportunity costs of providing tax money that could have gone somewhere else, and the result is a likely net loss to Wisconsin’s economy – according to the new study.

Williams, though, takes issue with elements of the Mercatus approach.

He acknowledged that his 2017 study “wasn’t a true cost-benefit analysis.” And he sees value in reducing the benefit estimate of a subsidy for, say, a new factory, based on the possibility that the company would have built the plant anyway.

But Williams thinks the “realistic range of estimates” the Mercatus study cities greatly understates the likely importance of Wisconsin’s subsidies in attracting Foxconn.

If he’s right, that would mean the study’s “realistic range” of benefits should be significantly higher. Which in turn would affect the cost-benefit analysis in Foxconn’s favor.

Mitchell said that with a package as large as Foxconn’s, incentives could play a larger-than-usual role in the decision to build.

But whatever that might be, the study suggests it still would be smaller than Williams estimates.

Contact Rick Romell at (414) 224-2130 or rick.romell@jrn.com. Follow him on Twitter at @RickRomell.