John Schmid

Milwaukee Journal Sentinel

When fiscal conservatives investigate government incentives to lure industries and create jobs, they often find that taxpayers end up paying large sums they never recapture.

“There are a lot of bad programs out there that should go away and we should be upfront about that,” said Greg LeRoy, director of Good Jobs First, a group based in Washington, D.C., that tracks corporate subsidies.

Was Wisconsin's record-shattering $4 billion package of tax breaks and subsidies for Foxconn Technology Group one of those bad programs?

That question flared anew in recent days as news outlets reported that Foxconn was planning to either scale back or suspend its plans for a massive liquid-crystal display manufacturing plant in Racine County. Foxconn on Friday said it still planned to move ahead with the plant.

Timothy Bartik would answer the question this way:

"It's unclear if the benefits would ever be as great as the incentive costs," said Bartik, senior economist at the Michigan-based Upjohn Institute for Employment Research who studies subsidies. "It was a very unusual deal."

At the heart of the subsidies debate is what sort of investments create jobs and whether those jobs will exist when the subsidies expire. The stakes are unprecedented with the Foxconn deal, which the Wisconsin Economic Development Corp. unveiled in 2017 as "the largest corporate attraction project in U.S. history as measured by jobs."

But the Foxconn project has evolved since then. Last year, the Taiwan-headquartered manufacturer of consumer electronics walked back its plans to construct a factory that would produce state-of-the-art panels, opting instead for a less-costly plant that would make screens for smaller devices such as phones and tablets.

The uncertainty makes it difficult to compute cost-per-job. On the low end, University of Georgia economics professor Jeffrey Dorfman calculates that state taxpayers will pay $230,000 per promised job — but that assumes all 13,000 jobs materialize, as promised under the original terms. And Dorfman's analysis only counts the $2.85 billion from state taxpayers and not the tens of millions committed by Racine County and local municipalities.

Counting all state and local subsidies, Wisconsin will pay Foxconn many times more than the average incentive offered in the U.S., according to Bartik's analysis.

The state's contract includes a job-creation payroll tax credit, which subsidizes 17 percent of wages. But when other investment tax credits, which are enshrined in the contract, are added in, Bartik calculates that the cost to Wisconsin taxpayers could be much higher. That includes state subsidies but not county and municipal aid.

It's a big deviation from past practice when Wisconsin and most other states on average subsidized only about 3 percent of wages, he said.

The national norm was even lower prior to the turn of the century when states paid as little as 1 percent of wages on average, said Bartik, who has studied subsidy-driven economic development since the mid-1980s. If states such as Wisconsin ever had rules and formulas to govern subsidy policy, those rules went out the window with Foxconn, Bartik said.

“If this sets a precedent for what other states do, it’s really going to be problematic,” Bartik said.

And when it comes to state subsidy policy, Bartik added:

"Rule No. 1 is to have rules" meant to ensure that tax breaks and subsidies can be replicated and sustained across the economy to include multiple industries and "without breaking the bank."

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Wisconsin's contract with Foxconn stipulates that the state only pays subsidies when Foxconn meets job-creation objectives. Because Foxconn fell short in 2018, Wisconsin hasn't yet paid any state aid. It's a different story in Racine County, which already borrowed and spent $130 million for land acquisition, sewers, water and roadwork.

Looking to a manufacturing renaissance

Foxconn is based in Taiwan but grew into the world's largest manufacturer of consumer electronics from a base of manufacturing operations that has spread across the low-cost mainland of China, where it also has many of its research and development labs.

Then-Gov. Scott Walker, who championed the Foxconn deal, justified the extraordinary cost to taxpayers, calling Foxconn potentially transformative for the regional economy.

With a single bold bet, the Foxconn deal promised the possibility of a Midwestern manufacturing renaissance, endowing Wisconsin with its own niche of the consumer electronics industry that currently only exists in Asia. But Wisconsin had to pay dearly to win the competition for the company; its Foxconn deal is the largest incentive package for a foreign company in U.S. history.

In a statement emailed to the Journal Sentinel on Friday, the WEDC said:

"The incentives offered to Foxconn took into consideration the truly transformational effect a completely new industry would have on Wisconsin’s economy beyond the direct job creation and capital investment of a single company."

WEDC said Foxconn’s investments in Wisconsin go beyond the construction site in Racine County to innovation centers in Green Bay, Eau Claire and Racine; a business office in Milwaukee; and a $100 million co-investment with the University of Wisconsin in establishing the Foxconn Institute for Research in Science & Technology (FIRST).

"These additional investments in Wisconsin over the past 18 months have been made without any financial payout by the state," the WEDC said.

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The subsidies, of course, are meant to be measured against the feasibility of the overall plan. And so it came as a surprise on Wednesday when the Reuters news agency quoted Louis Woo, one of Foxconn's senior executives, saying costs were too high in the United States to make televisions.

“In terms of TV, we have no place in the U.S.,” Woo told Reuters. “We can’t compete.”

This puzzled Bartik, who noted that wage differences have not fluctuated radically in the 18 months since the original announcement. "It makes no sense that U.S. labor costs are driving decisions in 2019 but not in 2017," Bartik said.

The gap in U.S.-China wage and production costs never has been a secret. Implying that wage costs already were factored in, the 2017 agreement even stipulates that Foxconn will employ "13,000 highly skilled workers in Wisconsin with an average salary of nearly $54,000."

Asked why wages are a factor in 2019 but not in 2017, the WEDC responded: "As a leading-edge technology company, Foxconn must, understandably, adjust its business model to reflect ever-changing global economic conditions, including evolving customer demands. These market forces, rather than a single plant’s operational costs, are what drive the company’s decisions."

In the wake of the latest reports that Foxconn was planning to suspend or scale back its Wisconsin plans, Foxconn Chief Executive Terry Gou spoke with President Donald Trump, who took credit for the initial deal. Afterward, Foxconn said in a statement Friday that it planned to move ahead with the manufacturing plant.

'Don't put your eggs in one basket'

LeRoy of Good Jobs First said his group was critical of the Foxconn deal from the beginning. "There never have been any liquid crystal display products manufactured in the Western Hemisphere,” making it unrealistic that a single deal can replicate the whole economic ecosystem in the Midwest like it does in China.

“I’m not opposed to incentives per se but you have to structure them in a way that doesn’t waste money," LeRoy said.

LeRoy's nonprofit has conducted more than 100 studies on how subsidies impact jobs, wages and the economy. The Good Jobs First website features a subsidy tracker database that catalogs more than 600,000 subsidy-driven projects in the U.S.

Asked if there’s any single rule that states should heed when they draw up subsidy offers, LeRoy was quick to reply:

“Don’t put all your eggs in one basket.”

States should never concentrate subsidies into a single company or sector. Nowhere is that more true, LeRoy said, than with technology companies such as Foxconn.

“Tech product life cycles are shorter,” LeRoy said. “These aren’t cars, these are computer screens. The amount of disruption is higher. Who’s still got their Palm Pilots and other ill-fated tech things that were the craze of the day?”

A textbook case of ill-fated tech subsidies came in 2004 when North Carolina agreed to pay $240 million for a Dell computer assembly facility — the biggest subsidy package in the state’s history, LeRoy said. By 2009, the plant had closed its doors.

Another ill-fated use of subsidies was the 325-acre campus that Motorola Inc. opened in 1997 in northern Illinois, just south of the Wisconsin border. Illinois pitched in $35 million in state subsidies. Meant to design and manufacture mobile phones, it featured a sprawl of buildings and two heliports. Motorola abandoned the campus five years later, after the subsidies ran out, and moved its operations to China.

An example of well-targeted subsidies can be found in Pittsburgh, which understood two decades ago that society needs energy-efficient construction materials. That includes a broad gamut of industries — not just single players.

“The idea is to help lots of companies knowing some won’t make it but some will,” LeRoy said. “That’s why Foxconn is the opposite of what should have been done."