Do Giant Tax Giveaways Like the Foxconn Deal in Wisconsin Work?
August 23, 2017
Wisconsin is the latest state to offer huge tax breaks to a company promising jobs, but such deals have a spotty track record.
Wisconsin is offering a massive incentive package to Foxconn, the Taiwanese electronics firm known for building Apple’s iPhones. In exchange for $3 billion in taxpayer-funded incentives, Foxconn plans to invest $10 billion in a huge LCD television factory, promising to create up to 13,000 middle-class jobs in the southeastern part of the state. Wisconsin Governor Scott Walker said the deal would be the single largest economic development project in the state’s history. The plan has been approved by the state Assembly, and the state Senate Joint Finance Committee held hearings August 22.
President Donald Trump took credit for the deal, announcing it at the White House with Gov. Walker, Foxconn CEO Terry Gou, and House Speaker Paul Ryan. Trump said that if he had not been elected, Foxconn would not be making the investment.
The Foxconn deal follows a familiar pattern: state or local governments offer tax breaks and other incentives to companies in exchange for jobs and investment. With critics calling the project the fourth-biggest “corporate welfare” pledge in U.S. history, it is worth asking whether such incentive plans actually bring about the results intended.
‘A Shell Game’
The organization Good Jobs First, which tracks subsidies and promotes accountability in economic development, called incentive packages “wasteful.” The group’s 2013 report, The Job-Creation Shell Game, points out that moving jobs from one state to another is redistribution, not creation. States typically offer breaks on property, sales and income taxes, infrastructure and land subsidies, low-interest loans, and cash grants at the closing of a deal or on a per-job basis. With all 50 states currently offering some type of incentives to businesses, the result is a race to the bottom. Worse, businesses can extract money from taxpayers simply by threatening to move away. Such bonuses are known as “retention incentives,” but Good Jobs First calls them “job blackmail.”
If states are competing with each other for scarce jobs, are any of them winning? Evidence of successful incentives-for-jobs deals is scarce. Part of the problem, according to The Pew Center on the States, is that many states have not taken the most basic steps to measure whether incentives work. Policy makers transfer billions of dollars every year from taxpayers to private businesses, but The Pew Center said that “no state regularly and rigorously tests whether those investments are working” and gets that information to lawmakers.
Without careful analysis, conflicting reports are common. In 2011, New Mexico lawmakers were reconsidering their state’s tax credit for television and movie productions, which topped $60 million per year. A 2008 study by New Mexico State University researchers found that the incentives brought in just 14 cents for every dollar spent, but a 2009 Ernst & Young study found that every dollar spent generated 94 cents in new revenue. New Mexico chose to cap the incentive at $50 million per year, and require film companies to submit more detailed spending reports.
In the absence of hard data on incentives, critics point out that there are many potential pitfalls. The Institute on Taxation and Economic Policy published a 2013 report that described numerous problems with incentive deals:
- State and local taxes are only a small part of doing business and are rarely the deciding factor for a business choosing where to invest. This means the incentives may simply not be necessary, and amount to a windfall for the company.
- It is impossible to guarantee that the benefits of tax incentives remain within a state’s borders. Companies can bring in out-of-state workers and purchase equipment in other states.
- Just as jobs may only be redistributed, not created, the economic gains of a company that benefits from incentives may be offset by losses to its competitors, reducing the positive economic effect for the state.
- Spending public funds on tax giveaways to private businesses means less money is available for education, infrastructure, police and fire protection, and other crucial needs.
- From a national perspective, reshuffling jobs from state to state has no benefit, and if incentives are effective, businesses may locate in areas that are not otherwise optimal, which is inefficient.
Many incentive deals have failed to deliver promised results. In 2004, the state of North Carolina offered a $240 million incentive package to Dell Computers, which promised to build a new facility and create 1,500 jobs within five years. Less than five years later, the facility closed, and about 900 jobs were lost. New York State spent $53 million in two years promoting its incentive program for startup businesses, claiming to have attracted 159 companies and created 408 jobs. Whether the programs actually created the jobs is unclear, but critics say that the cost of $130,000 per job cannot be considered a success, especially since that figure includes only the promotion and marketing costs, not the dollar value of the incentives themselves. In Michigan, a review of the former flagship economic development program found that only 2.3 percent of projects met or exceeded expectations for job creation. From 2005 to 2011, the state issued so many tax credits that it is on the hook for more than $5 billion through 2036. Of 122,785 new jobs projected, only 13,914 have been created.
In Wisconsin, the state government is showing some signs of caution on the Foxconn deal. Mark Hogan, CEO of the Wisconsin Economic Development Corp., said that the agency would seek to require Foxconn to hit certain employment targets or return incentive funds. Hogan claimed that production workers in the new factory would be paid more than $20 per hour. Democratic lawmakers said they were seeking stronger protections for taxpayers and the environment, and that they wanted all workers at the facility, including drivers, janitors and cafeteria workers, to be paid at least $15 per hour. Sen. Alberta Darling said that the state Senate will likely vote on the Foxconn deal the week of September 11.