Today, we are pleased to present a guest contribution by Ann Markusen, Professor Emerita and Director Arts Economy Initiative and Project on Regional and Industrial Economics at the Humphrey School of Public Affairs at the University of Minnesota.
Recently, President Trump announced a deal with Taiwanese-owned FoxConn for 3,000 plus jobs in a new Wisconsin factory making liquid crystal display panels. The bill for Wisconsin taxpayers: $3 billion over 15 years, $200 to $250 million annually in foregone state and local tax payments. Wisconsin will also provide infrastructure, public services and training grants at a cost yet to be revealed. The Governor also hopes to liberalize the state’s tax increment financing to enable a massive new TIF district for the plant, which could add hundreds of millions of dollars more in taxpayer costs. Existing Wisconsin companies and households will face higher taxes, poorer public services, or some of both, as a result.
Yet for all that, the plant may never be built. “FoxConn has a relatively bad track record on following through,” wrote Tim Culpan in Bloomberg Businessweek. In 2013, the company announced plans to build a $30 million plant in central Pennsylvania that never materialized. In 2014, it signed a deal in Indonesia to build a $1 billion plant in Jakarta that fell through, too. Culpan concludes, “Wisconsin isn’t building the American Dream – America is building the Foxconn machine.”
In Minnesota, we’ve had many disappointing experiences with such deals. Programs designed to encourage rural and small town plants ended up subsidizing suburban metro sites instead. Despite their stated legislative intent, they were granted more often to large firms than small ones. Tax incentives are unfair to existing firms in the same market. Gander Mountain, for instance, a Minnesota-based sporting goods company, begged the state legislature to deny tax increment financing (TIF) to subsidize Bass Pro and Cabela’s moves into the state – it didn’t happen. This unfair competition – tax breaks not offered to the Minnesota competitor – is a major cause of Gander Mountain’s current difficulties.
Generous tax incentives also shift the burden of paying for the public services required by new establishments to existing firms and households, most of whom gain nothing from the jobs. Indeed, the southeastern Wisconsin plant, should it materialize, is likely to hire many of its workers from across the line in Illinois.
Researchers, including many public accounting professionals, oppose these kinds of giveaways. In 2004, I convened a national conference on business tax incentives at the University of Minnesota. In our book, Reining in the Competition for Capital, we call for a unified state economic development budget that would enable legislators, journalists and the public to clearly see how these tax expenditures (as economists call them) compare with tax money spent on other economic development tools. Place and people-based investments should be favored in structuring deals over company-based assets that can be removed or destroyed if the business decamps. Benefits should be performance-based: paid out only after the business has produced the jobs it’s promised. Incentives should be awarded only for the first few years and not extended far out into the future. All deals should include clawbacks that require repaying the state in the case of shortfalls, and these should be vigorously enforced.
Sunshine, we concluded, is the best antiseptic. All incentives should be fully disclosed. Minnesota was a 1995 early leader in this regard, but fell behind as online disclosure became the norm, starting in 1999 in Ohio. All incentivized jobs should be monitoring to ensure the quality of jobs created and that they do not displace existing businesses’ income and jobs. Site consultants, who sometimes “work both sides of the street” and sometimes work on commission, should be registered and regulated as lobbyists.
A broad coalition, led by the nonprofit Good Jobs First, has also promoted safeguards such as money-back clawback provisions. One city even stopped a plant closing by suing to prevent the removal of subsidized machinery in Duluth in 1988. In 2016, in another win for taxpayers, the Governmental Accounting Standards Board began requiring that states and localities report the costs of corporate tax breaks, including foregone state and local property, income and sales tax revenues.
What does work to create jobs? Intervening to help existing companies large and small through hard times is a better use of resources and more likely to save good jobs than asking taxpayers to foot the long-term bill for a speculative new venture. So is nurturing local entrepreneurial firms with good employment prospects.
Training programs – like those that Minnesota is pioneering to connect state and community college curricula with employers’ needs – are a much better (and vastly cheaper) way to creating and maintaining jobs. So are investments in research on new technologies. Taconite is an excellent example, a university-initiated process that has sustained jobs on the Range for decades. And expanding our high school curricula to teach manufacturing skills like welding, environmental assessment, sewing, and other skills that will help existing Minnesota businesses thrive.
The Trump administration, meanwhile, is investing in publicity-driven deal-making while it undercuts some of the best federal programs in job creation. Greg LeRoy reports in Fast Company that the Trump budget proposes to eliminate the Manufacturing Extension Partnership, “a longstanding and successful program with bipartisan support that helps small-and medium-size manufacturers adapt to new technology.”
Understanding how complicated deals work can be mind-numbing for citizens, but improvements in transparency and report procedures will make it easier. Above all, be skeptical, especially of the biggest, flashiest deals.
Sources and further reading:
Tim Culpan, “America and the Foxconn Dream: This package could buy an iPhone for everybody in the state.” Bloomberg Businessweek, July 27, 2017. https://www.bloomberg.com/news/articles/2017-07-27/america-and-the-foxconn-dream
Ann Markusen and Kate Nesse, eds. Reining in the Competition for Capital. Kalamazoo, MI: Upjohn Institute for Employment Research, 2007.
Greg LeRoy, “Foxconn’s $3 Billion Tax-Break Deal Is A Loss for Smart Jobs Policies.” July 29, 2017
https://www.fastcompany.com/40446054/foxconns-3-billion-tax-break-deal-is-a-loss-for-smart-jobs-policies
Greg LeRoy, The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation. San Francisco: Berrett-Koehler Publishers, 2005. Free online at http://www.goodjobsfirst.org/GAJS
This post written by Ann Markusen.
FoxConn may have invested in the U.S. anyway, or soon, without government incentives in a state with less regulations and lower taxes, since China may have reached, or is close to, the Lewis turning point.
Seems like a reasonable premise: if your state has a competitive taxation system, provides potential employees who are educated and responsible, recognizes the need for modern and well maintained infrastructure, and makes it easy to do business within the state by having only the necessary level of regulation needed for safety and environment that is simple to understand and follow, then your state doesn’t need special incentives to attract or keep businesses.
Minnesota should be proud to have such an environment where special tax breaks to certain types of businesses are no longer needed.
China’s rising production costs and the huge difference in labor productivity can make it cheaper to produce in the U.S.. Yes, the U.S. has many advantages over China, including in country risk.
Oops, Minnesota forgot to tell its other neighbor about those bad tax breaks. https://www.reuters.com/article/us-apple-iowa-idUSKCN1B422L
Dr. Markusen would not approve. Oh, wait.
https://mn.gov/deed/business/financing-business/tax-credits/data-center-credit/
Well, you have to keep up with Iowans and Wisconsinites.
As though we needed one, these kinds of state and local tax incentives are yet another reason why we should abolish the states. Both political parties engage in this kind of “economic development”, but lately it seems that GOP controlled statehouses are especially vulnerable to this kind of ersatz economics. Bruce Hall referred to a Reuters article concerning some Apple deal that Gov. Reynolds was trumpeting. She’s an idiot. When it became clear that Gov. Branstad would be leaving the GOP pushed her to get some kind of college degree. She is basically too stupid to get accepted into a real degree program, so she quickly “earned” an unaccredited online BLS “degree”. And then there’s Gov. Walker, who is also an idiot without any kind of degree. This is a pattern with the far right darlings at the state level. One Iowa GOP legislator actually took a management certificate he received while a teenager working at Hardees and tried to pass it off as a business degree. These people simply don’t have the smarts or the education to understand economic development, so they are vulnerable to BS stories from companies and corrupt staffers at the state economic development commissions.
Abolishing the states contradicts the United States of America. If you don’t like state policies, you can move to another state (e.g. much of the middle class in California fleeing to other states). You can’t do that with federal policies.
A Michigan conservative organization’s take on state subsidies: http://www.michigancapitolconfidential.com/lansing-politicians-put-favored-businesses-ahead-of-everyone-else
Conclusion:
“Getting rid of the giveaways that are ineffective and unfair to residents and businesses alike would go a long way to making us a state where people are put ahead of the business of awarding favors.”
Oh, yeah. As if we can believe anything those conservatives say about state governments….