Last week, President Trump and Wisconsin Governor Scott Walker announced that Taiwanese manufacturer Foxconn, a major supplier of LCD screens to Apple, would receive $3 billion in tax subsidies to locate its new manufacturing facility in the rustbelt state.
The Foxconn megadeal would purportedly bring 13,000 jobs and $10 billion in capital investment to the state. At $200 million to $250 million per year in public incentives, the state is averaging a cost of $15,000 to $19,000 per job annually – over 6 times the national average of $2,457 per job for an average incentive package.
At this high cost per job, not to mention foregone infrastructure investments and workforce initiatives, it is worth asking whether these deals really make sense for states or the country.
Here are three questions any policymaker should ask when brokering economic subsidy deals:
1. How likely is the deal to bring results?
Too often, economic development announcements score political points for elected officials and business leaders but don’t result in action.
Foxconn has a track record here. In 2013, for example, the company announced it would invest $30 million and create 500 jobs in Pennsylvania, but the plan never came to fruition. Foxconn also reportedly signed a 2014 letter of intent to invest $1 billion in Indonesia that never materialized, with similar poor follow-through on deals in Brazil and Vietnam.
States can and do enact evaluation, accountability, and transparency measures to prevent just this outcome. Wisconsin could do the same - structuring its incentive deal with claw back provisions, performance standards, and reporting provisions to ensure that the state is getting the most out of its public dollars. The Wisconsin Economic Development Corporation says that the deal will include similar measures, but the Wisconsin legislature needs to follow through.
2. What would have happened without the incentives?
You might miss it through all the megadeal rhetoric, but research suggests that real economic activity is fairly unresponsive to changes in taxes. This makes sense given that state and local taxes make up only 2 percent of most firms’ cost structure. The attractiveness of a region matters a lot more than specific tax incentives offered in a city or town.
In 2016, firms ranked highway access, availability of skilled labor, and cost of labor as the most important business location factors. Tax incentives may be effective at influencing decisions within regions, where companies have access to similar labor force, transit systems, and infrastructure, but in most cases firm locations are driven by regional economic conditions.
If you don’t believe the research, listen to CEOs. In May, for example, after breaking ground on its new Boston headquarters, which received $275 million in public incentives, General Electric’s Chief Financial Officer said that the incentive package wasn’t the primary influencing factor.
Similarly, in an interview with a Wisconsin paper, Foxconn Chairman Terry Gou identified regional factors that made Wisconsin an attractive location unrelated to tax incentives: existing partners in Wisconsin such as GE Healthcare, proximity to transit and business hubs Chicago and Lake Michigan, quality infrastructure and higher education system, and availability of renewable energy.
3. Is competition between states making the nation worse off?
Wisconsin was hardly alone in wooing Foxconn. Seven states vied for Foxconn’s business, including Michigan, which adopted a new $200 million annual tax incentive program to lure the manufacturer. Other governors reportedly made trips to Asia to negotiate with Foxconn, in an opaque process typical of megadeal negotiations.
And Foxconn expressed a desire to invest in the United States prior to receiving a package from Wisconsin, at least going back to its now defunct 2013 Pennsylvania promise. The chairman has called the US a “must-go market” and commented that the US is an attractive place for a facility because it is the largest consumer market in the world.
The only question at stake, it seems, was which state Foxconn would choose. From a local perspective, for cities and counties vying with their immediate neighbors, offering firms a tax deal can make sense. But is it a “win” nationally if states feel pressure to expend scarce resources wooing jobs that will land in the US anyway? One could get tired – and go broke – from all this winning.
