Foxconn’s Low Return on State Investment

Foxconn chairman Terry Gou and Governor Scott Walker signing a memorandum of understanding. Photo from the State of Wisconsin.

As reports of other Wisconsin subsidies to recruit businesses come to light, the historically high Foxconn subsidies at $2.8 billion continue to look out of proportion.

Not counting additional local support for projects, the Wisconsin tax credits, which often will be in the form of pure cash payments to manufacturers and agri-businesses, vary widely deal by deal.

A recent accounting of the 49 other top economic development projects in the state in 2017 showed that those expansions would create about 5,000 jobs. That‘s a very positive track record, and Gov. Scott Walker rightly crowed about it.

Those new jobs, though, were a bargain compared to the Foxconn subsidies. The 49 companies, including 14 in the food and beverage industries, were awarded a total of $114 million in tax credits.

You can do the math. That divides out to about $23,000 per additional job.

Obviously, the Wisconsin Economic Development Corp. (WEDC) takes other factors into consideration when determining how much taxpayer money the state will throw into a deal. They look at investment levels in the expansions, pay levels and benefits, retention of existing jobs and the introduction of new technologies to the state’s repertoire.

Nonetheless, the main criteria will always the number of new jobs created. Gov. Walker promised that he would create 250,000 new jobs in his first term, and his promise paid off at the polls. Looking back, he batted about 50% on the jobs target.

Now he is trying to hit that number by the end of his second term. Foxconn may add several thousand by the time he runs for his third term in November 2018, but that’s a small piece of 250,000. The broad array of Wisconsin employers, most of which were once startups in the state, and entrepreneurs carry the ball for the most of the job creation.

In fairness, the unemployment rate in the state is running at a very low 3.2%, so the lack of qualified workers has become an inhibitor on growth. Companies have a lot of openings for skilled workers. Population growth is slow in Wisconsin, only slightly positive.

So every politician, Republican and Democrat, has taken up workforce development as a major strategy, rightfully so. We need every employable citizen trained up and matched to a job. Every employer needs to ramp up its training and education budget.

All that said, the wide range of subsidies is noteworthy. Here are a few individual awards per job created:

• Haribo, a candy maker in Pleasant Prairie, near Foxconn’s site, 385 jobs at $54,000 in tax credits per job.
• Master Gallery Foods, a cheese plant Oostbug, 150 jobs at $17,000 apiece.
• Johnsonville Sausage, Sheboygan Falls, plus 100 jobs at $100,000 apiece.
• Kwik Trip, La Crosse, plus 329 jobs at $64,000 piece.
• Generac Power Systems, Waukesha, plus 400 at $25,000.

I like the concept of “Return of Taxes” (ROT) for perspective on subsidies. A new job at $50,000 sends back about 10% per year to state coffers in sales and personal income taxes, or $5,000. So, the $54,000 per job credit at Haribo equates to about an 11-yer payback.
At $220,000 per job, Foxconn’s ROT is 44 years.

There are, of course, other positive effects down the supply chain.

The board of WEDC, a public-private collaboration, has the tough task of weighing the trade-offs as they set the level of credits. For instance, is the retention of a headquarters involved? That’s the case for Generac, Kwik Trip, Johnsonville, and U.S. Venture Inc. in downtown Appleton.

Other states compete hard to steal headquarters. Recruiters know that where the executives and their spouses hang their hats makes a big difference to a community and a state, such as taxes on executive salaries, selection of R&D partners, selection of vendors in the supply chain and leadership for civic and charitable causes.

Where, for instance, would Milwaukee be without the headquarters of NML, Rockwell, Briggs & Stratton and Manpower (all of which started here)?

The bestowal of subsidies is a tricky business, both in terms of paybacks and in terms of politics. Clearly, Gov. Walker is making a huge political bet in the recruitment of Foxconn at several multiples of other recent awards, even of those where a headquarters expansion is involved.

By the time he runs for his fourth term (assuming reelection in November and to tie Tommy’s four terms) in 2022, we will know if his high-risk bet, which I have supported, paid off.

John Torinus is the chairman of Serigraph Inc. and a former Milwaukee Sentinel business editor who blogs regularly at johntorinus.com.