Not Foxconn in the Henhouse

But maybe Walker in the henhouse.

From the Legislative Fiscal Bureau, the Memorandum of Understanding between Wisconsin and Foxconn states:

…Foxconn agrees to invest $10 billion to construct, over six years, a facility in Wisconsin and create up to 13,000 jobs, with a reported average salary of $53,875 over a period of up to six years. The state’s agreement, under the MOU, among other things, is to provide up to $3 billion in an economic package which would include refundable tax credits and a construction sales tax exemption for Foxconn.

What is the benefit cost calculation for the state’s taxpayers? To undertake the analysis, one would need to make a set of assumptions; these include:

  • The project will require an average annual employment of approximately 10,200 construction workers and equipment suppliers earning an average total compensation of approximately $59,600 (including benefits) per year during the four-year construction period (from 2018 through 2021). Total income for these individuals is estimated at $2.4 billion.
  • Nearly 6,000 indirect and induced jobs will be created during the construction period, with an average total compensation of $48,900.
  • Additional construction-period jobs would generate increased state tax revenues (primarily income and sales taxes) equal to approximately 6.3% of the additional gross wages. The total increased state taxes associated with the construction period are estimated at $186.9 million.
  • Permanent staff at the Foxconn facility are estimated to increase from about 1,000 in the second half of 2017 to 13,000 beginning in calendar year 2021. The average annual wage for these employees is estimated at $53,875… Total ongoing payroll at the company is projected to be $13.8 million for the remainder of this year and increase to approximately $700 million annually beginning in 2021.
  • All employees are Wisconsin taxpayers (i.e., no Illinois residents).
  • State tax revenues associated with the additional employees and wages are estimated to increase from about $900,000 this year to $44 million annually beginning in 2021.
  • Indirect and induced jobs associated with the project are estimated to total 22,000 beginning in 2021, based on a multiplier of 2.7. Average annual wages for these individuals are estimated at approximately $51,000.
  • Total ongoing wages are $1.12 billion annually, and related state taxes at $71 million per year. Smaller impacts are estimated in calendar years 2017 through 2020.

The conclusion:

[Wisconsin Department of Administration] projects that the cost of the refundable state tax credits under the bill will exceed the potential increased tax revenues until the last EITM payroll credit is paid in fiscal year 2032-33. As of the end of that year, the cumulative net cost of the incentive package is estimated at $1.04 billion. Beginning in 2033-34, payments to the company would cease and increased state tax collections are estimated at $115 million per year. DOA estimates that the project’s break-even point would occur during the 2042-43 fiscal year.

In Figures 1 and 2 below, I summarize state payments and revenue increases, and net benefits flow and cumulation, respectively. The astute will note that state payments is front loaded into the first 15 years (after which Foxconn could walk away), and that even under the fairly optimistic assumption of 13,000 additional jobs, the break-even occurs in FY 2042-43.

Figure 1: State payments (blue) and increased tax revenue (red) under August 2017 Special Session Assembly Bill 1, in millions of dollars, by fiscal year (2018 indicates FY 2018-19). Source: Legislative Fiscal Bureau, Table 4.

Figure 2: Net benefits calculated as increased tax revenue minus state payments under August 2017 Special Session Assembly Bill 1 (dark blue), and cumulative (purple), in millions of dollars, by fiscal year (2018 indicates FY 2018-19). Source: Legislative Fiscal Bureau, Table 4.

As noted, there is wide uncertainty over the increase in employment. LFB blandly observes:

There have been press accounts suggesting that employment at the proposed facility would be closer to 3,000 instead of 13,000 permanent positions. If this were the case, using the other assumptions outlined above, payments of the EITM payroll tax credit would be reduced from just under $1.5 billion to approximately $345 million over the 15-year life of the EITM zone, but the capital expenditure credit would still be estimated at $1.35 billion. The estimated ongoing tax benefits from the project would decrease from $115 million to $27 million per year, and the breakeven point would be well past 2044-45.

There is a serious question of whether Foxconn will fulfill its commitments. Hiltzik at LA Times highlights the 2013 Pennsylvania deal.

Foxconn itself is getting a reputation for making lavish promises and letting them lapse, as appears to have been the case with a project the company touted for Harrisburg, Pa., in 2013. That deal was for a $30-million plant employing 500 workers. But the plant hasn’t materialized.

And from Wisconsin Gazette:

n the midst of all the jubilation and hype, it’s important to remember that Foxconn has earned a reputation for failing to meet its pledges. The business publication Crain’s warns, “Foxconn Technology Group … has a history of big promises with little to no payoff in the United States.”

Foxconn abandoned the commitments it made to Harrisburg, Pennsylvania, where CEO Terry Gou promised that its small 50-person operation would be expanded into a manufacturing facility with 500 workers. Its announcement generated an “intense buzz” that was “created by a chief executive known to promise projects all over the world that never quite pan out,” The Washington Post reported.

Promises of new or expanded investment by Foxconn also have been broken in Brazil, China, India, Indonesia and Vietnam.

“There’s a pattern here,” observed Alberto Moel, a senior analyst with Bernstein Research in Hong Kong.

Bloomberg News noted that Foxconn’s total commitments now stand at $27.5 billion, which is more than Hon Hai has spent in the past 23 years.

The fact that this venture does not seem to be a big positive for Wisconsin seems to match the literature that indicates state tax incentives to relocate businesses do not typically have big payoffs. From a survey by Buss (2001):

Tax literature, nowin hundreds of publications, provides little guidance to policy makers trying to fine-tune economic development. Taxes should matter to states, but researchers cannot say how, when, and where with much certainty. Firms may need tax incentives to increase their viability in some locations, but researchers cannot definitively say which businesses or which locations.

Perhaps more relevant to this specific case:

…declining companies tended to take advantage of programs targeted toward distressed areas, whereas growth companies tended to locate in nondistressed counties. Tax incentives made distressed areas worse or no better off, whereas nondistressed areas always improved


Question: Will we be watching LCD tv screens in 27 years?

12 thoughts on “Not Foxconn in the Henhouse

  1. PeakTrader

    From Milwaukee Journal Sentinel:

    “Under the incentive package, the state would pay Foxconn up to $2.85 billion in cash over the next 15 years and waive an additional $150 million in sales taxes on construction materials. Over those 15 years, state taxpayers would pay $1 billion more to the company than the additional taxes that would be generated by the deal, according to a report from the nonpartisan Legislative Fiscal Bureau.”

    What about the additional taxes to the federal government and less federal and state spending on the unemployed?

  2. Steven Kopits

    It’s that ‘refundable’ word. Ideally, it shouldn’t be more than a credit against taxes due.

    Also, the main cost, I think, is of the opportunity sort. With Wisconsin seemingly close to full employment, why does it need a 13,000 person manufacturing facility with no tax revenues? It makes more sense if you think the economy will tank during the start up period (maybe not a bad guess).

    That’s another reason with beliefs about the regime are so important.


    …it’s just a normal cycle and we’re at the top of it, then maybe the deal makes sense to offset potential job losses in the next downturn.

    …if it’s a recovery from a depression, then the economy should boom by itself and there’s minimal incentive to grant more than a modest deal.

    ….if it’s a demographic led labor market (a la Japan), then labor will continue to be in short supply and the economy seems less likely to cycle in a typical boom-bust fashion. The primary reason to bring Foxconn would be higher productivity, ie, higher paying jobs. Not clear how that stands.

    Which model you think most likely will influence your view of the deal.

  3. 2slugbaits

    It gets worse. Part of the deal gives Foxconn immunity from environmental regulations that apply to other companies. No company would insist on that kind of immunity unless they intended to make use of it. Foxconn also has a miserable worker safety record. Then again, Gov. Walker is probably thinking about a soft, cushy job after he leaves his current job.

    1. Steven Kopits

      Slugs –

      Back in the day, I did some work on the environmental topics for a power plant fund.

      Environmental and associated regs (eg, infrastructure) can prove a huge shake-down for a prospective investors. For example, if you look at the contractual docs for, say, a power plant in California, you’ll find the municipality has managed to squeeze a bridge, a road, a fire station and a school out of the investor. And all this is negotiated piecemeal, really death by slow torture.

      So I have so sympathy for the environmental carve outs, but they do tend to catch your eye as peculiar and more than a bit suspicious.

      1. PeakTrader

        California is also very aggressive collecting any underpayments or disputes in state taxes, which are high.

  4. pgl

    So net benefits start off negative and only years later are expected to be positive per this exercise. But – wait. Should we not apply some sort of discount to expected future benefits. Yes I know we live in a world of low interest rates but shouldn’t the discount rate still be greater than zero?

    1. Menzie Chinn Post author

      pgl: In principle, they should have both deflated, and discounted, but I think in order to make the calculation as transparent as possible, they did what they did. Of course, had they deflated, and discounted, the cumulative net benefit calculation (or NPV) would have looked worse.

  5. noneconomist

    Fairly obvious Walker could use some serious hyperbole to cement the deal. Maybe something original like ” Look out Texas, here comes Wisconsin! ” Or “Foxconn will be a shot of adrenaline into the heart of the Wisconsin economy!”
    When you really put your mind to it, there’s no telling how creative you can be.

  6. Beeker25

    The deal was created so Walker can claim credit that he is creating jobs so he can get re-elected to the third term. Your last sentence should be the open considering that the technology will change.

    1. Jake formerly of the LP

      Precisely. This deal has much more to do with Walker having an approval/favorability rating around 40% and cynically thinking he can buy off voters with a promise of “JERBS!”

      But it seems like it’s backfiring, as maybe voters aren’t as stupid as Walker thinks they are, and they see the Fox-con as the crooked boondoggle that it is.

  7. Beeker25

    The last question in the article should be the open question. The facility is located next to the Illinois border so most people from that state will apply for the openings should it materialize.
    Good job on this information.

  8. Nathan Heinrich

    Been waiting to hear your thoughts on the deal. Thanks for sharing your analysis. Seems to be more of political ploy for his re-election rather than a serious economic investment.

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