Study undercuts Wis. subsidies for Foxconn
Potential $3.6B investment in megafactory might actually depress economic development
Christopher Murdock, Wisconsin’s then-Gov. Scott Walker, President Trump, Foxconn CEO Terry Gou, and U.S. Rep. Paul Ryan, then speaker of the House, attend the Foxconn groundbreaking ceremony in Wisconsin in June 2018. (Executive Office of the President of the United States)
By Ted Cox
A new academic study calls into question whether major government subsidies to businesses spur economic development — using the potentially $3.6 billion Wisconsin investment in a Foxconn electronics factory as a prime example.
The study on “The Economics of a Targeted Economic Development Subsidy” states up front: “The weight of economic theory suggests that these subsidies do not work and may even depress economic activity.” Zooming in on Wisconsin’s massive subsidy package designed to lure the Taiwanese electronics factory to the state, which will divert between $1.2 billion and $3.6 billion to Foxconn, it determines “that under realistic scenarios the subsidy may depress state economic activity by tens of billions of dollars over the next 15 years.”
Foxconn’s plans to build a massive factory to produce large flat-screen televisions generated fierce competition among state and local governments to attract the site. Wisconsin won it with the subsidy package valued at up to $3.6 billion, as well as a site on Lake Michigan in the southeast corner of the state and grants to freely use lake water. The state also has no corporate income tax on manufacturers.
Foxconn broke ground in June 2018 in a ceremony attended by President Trump, then-Gov. Scott Walker, and former U.S. Rep. Paul Ryan, who was then speaker of the House. But Foxconn downsized its plans for the factory and, according to Wisconsin Public Radio, briefly considered not manufacturing anything at all at the factory before now committing to begin operations in a year.
Foxconn missed its initial deadline to create 260 jobs at the factory by the end of last year, and now must hire 1,820 people by the end of next year to collect a $270 million tax credit. It has to put 13,000 people to work by 2032 to collect the maximum $3 billion in subsidies.
“The case for targeted economic development subsidies is quite thin. ... Subsidies do not create widespread economic growth.”
A Wisconsin government audit earlier this year determined that on average firms receiving state subsidies produce only about a third of the initially promised jobs.
Produced by the Mercatus Center at George Mason University in Virginia, the study turns a jaundiced eye to the project, in which the state committed up to $3 billion in subsidies, then added another $600 million in infrastructure, training, and development programs. Locally, the village of Mount Pleasant and Racine County ponied up more than $750 million through the creation of a special financing district and ultimately increased that to more than $900 million. WPR quoted the study’s head researcher Michael Farren as saying, “Wisconsin is pretty much already on the hook for over a billion dollars in subsidies if Foxconn were to leave tomorrow.”
The study suggests that, if maxed out, the $3.6 billion represents 1 percent of state tax revenue over the next 15 years. By contrast, it projected, if the state were to cut taxes on residents by 1 percent over that time it would generate $20 billion in economic development.
It pointedly added: “Consider this fanciful but feasible alternative: The $3.6 billion in subsidies that Wisconsin promised Foxconn could instead have built 7 square miles of greenhouses to motivate orange growers to move from Florida."
Basically, the study concludes that government subsidies produce corporate inefficiency because they encourage businesses to locate in spots other than the ideal setting, then reward them on factors that may not be best for the business. It suggests that the “multiplier” effect, of subsidies having an exponential impact on growth, is exaggerated. It adds: “While a tax cut or outright subsidy for one firm may indeed spur additional economic activity, it comes at the cost of higher taxes for other individuals and businesses or of reductions in public services, discouraging economic activity in other parts of the economy. Moreover, economic theory suggests that such uneven taxation does more to discourage economic activity — it has a higher deadweight loss — than broad-based, low-rate taxation. Using Wisconsin’s Foxconn subsidies as an example, we have shown that under most plausible scenarios, the taxes funding the subsidies will discourage more economic activity than will be encouraged by the subsidies themselves. In short, the net effect of targeted economic development subsidies is likely to be negative.
“The case for targeted economic development subsidies is quite thin,” the study states, adding, “Subsidies do not create widespread economic growth.” It called the almost $50 billion a year states and municipalities spend in trying to top each other in subsidizing business “a strategy that will hamper economic development for decades to come.”