Brewtown Gumshoe: August 2017

Friday, August 11, 2017

The Con That Is Foxconn or How Republicans Learned To Stop Worrying And Love Socialism For The Rich

Seems everyone is writing and talking about Foxconn possibly building a $10 billion factory in Wisconsin. Governor Walker has been talking up the jobs angle. Other lemmings are being good little boosters and putting slogans like "big league" and such out there to describe the situation and what it could mean for Wisconsin.

Luckily, there has been some push-back. Hopefully we can muster enough resistance to sway opinion against this mega-corporate-welfare boondoggle.

I've written about economic development incentives many times before. To reiterate:

This whole incentive game is blackmail and is terribly inefficient. It makes cities bid-up giveaways to corporations dangling jobs in front of city leaders. It leads to less-than-optimal locational decisions, and often cities never recoup the subsidies. Local leaders, legislators, and public servants should be cooperating with national leaders to enact federal legislation banning such zero-sum games.

So what do we know about this latest specimen of corporate welfare?

Well, let's back up a bit first and add some context to the discussion.

Republicans are always droning on and on (pretending to be economists and financiers) about the "free" market, capitalism and how, if government just got out of the way, the private sector will lead us all to the promised land.

As Barry Ritholtz wrote:

America’s titans of industry and finance work hard to convince us that they are masters of their fate, unbeholden to anyone or anything aside from the profit motive and whatever serves the greater good of business and free enterprise.

If only it were so, because the reality is that too many of them are afraid of undertaking new ventures without government holding their hand for reassurance, tax abatements, loans, subsidies or -- in some instances -- all of the above.

Last week, was a case in point: Wisconsin, a state controlled by that patron of free markets otherwise known as the Republican Party, announced a deal with Foxconn Technology Co. to give $3 billion in incentives for the Taiwanese manufacturer of iPhones to build a flat-panel TV factory within its borders. In exchange, Wisconsin got ... well, some nice words.

Here is yet another example of their blatant, self-serving hypocrisy. Republicans (the dutiful little servants of the top 1%) love socialism for the rich, but not so much for the little guy.

As with all corporate welfare, the first question should always be, "Why is the public providing money to millionaires and billionaires?" If they are so all-knowing, efficient and bottom-line oriented, shouldn't they be making locational and company decisions based on comparative advantage, labor force needs, and other business-specific concerns? If they are simply locating in the place offering the largest welfare package, how is that efficient or good for long-term business?

Typically companies simply put out the idea that they have a few locations in mind to get those locations to start bidding up the welfare package against each other. As some have termed, the war among the states or the war among the cities. Yet, the companies actually already know where they'd like to build - based on actual quantified site selection variables. This dangling of potential jobs really just results in leverage for the companies in their blackmailing of cities and states.

And, for Wisconsin, why would the state spend $3 billion to attract jobs when the state's unemployment rate is, as of April 2017, at 3.2%?

So, now, what do we know about this latest specimen of corporate welfare?

Michael J. Bologna detailed, "WEDC said Foxconn would be eligible for up to $3 billion in tax credits over 15 years. That total includes up to $1.5 billion in state income tax credits for job creation, up to $1.35 billion in state income tax credits for capital investment, and $150 million for sales and use tax exemptions."

The Wisconsin Democracy Campaign also discovered, "The bill, which is expected to be voted on by the legislature this month, includes $10 million in tax breaks intended to keep Fiserv, a Brookfield-based company that makes products for banks and credit unions, from relocating its headquarters to another state." It's just raining corporate welfare in Wisconsin.

Regarding the Foxconn boondoggle, The Wisconsin Budget Project found:

The cost per job is somewhere between $200,000 and $500,000.
At a minimum, the corporate welfare will cost state taxpayers over $17,000 per job, per year, for 15 years.
The cost of tax breaks for manufacturers, with state taxpayers making a guarantee to cover up to 40 percent of local losses from spending for the project, and the unknown costs from unprecedented exemptions from environmental regulations.

For some perspective, Timothy Bartik, of the W.E. Upjohn Institute for Employment Research, calculated the typical subsidy, in these situations, is $2,457 per year. Thus, the Wisconsin project cost ($17,000 per year) would be 567% higher than the typical subsidy. “It’s a very, very costly package, and I’m skeptical that the benefits justify such big incentives,” Mr. Bartik said. “This is well beyond the typical deal.”

Bartik also elaborated:

Any benefit-cost evaluation of tax incentives needs to take into account that even without the incentive, a considerable portion of the incentivized activity would have occurred anyway, or that other substituted business activity would occur. For example, even without incentives, vacant buildings zoned for development will help attract new business activity. Incentives can help speed up this process, and may help target new development toward business activities with a higher payoff for state economies in increasing average earnings per worker. But this requires that incentives be carefully targeted and designed to maximize benefits while minimizing costs.

Bartik has also argued that economic development incentives that are delivered in the form of customized services, such as customized job training and manufacturing extension services, are likely to be more cost-effective than most business tax incentives.

As Ben Lovejoy enlightens, "The state would be paying for 30% of Foxconn’s total investment in the plant, and this wouldn’t be the end of it. In addition, like other manufacturers in Wisconsin, Foxconn would pay no corporate taxes on profits from sales on products made here. The incentives would cost the state about $200 million a year."

Patrick Marley and Jason Stein found, "The memo signed by Walker and Foxconn executives would: Lift caps on TIF deals and extend them for longer durations. Expedite government permit reviews for the project. Expand a tax credit program known as enterprise zones that the state uses for its biggest jobs deals."

Bruce Murphy revealed:

But the Foxconn deal will give away tax money in a style that makes the WEDC look like a piker. Rather than a tax credit for seven percent of payroll, Foxconn will get 17 percent, and for 15 years, not nine. In short, the state will get less than 30 percent of the tax credit back in income taxes paid by workers, losing a huge amount of money for 15 straight years.

But the Foxconn deal offers much more than this. The company also gets a 15 percent tax credit on all capital expenditures it makes for seven years. Since Foxconn, due to Walker’s Manufacturing and Agriculture Tax Credit, will pay little or no corporate tax, probably none of this giveaway will be recovered. Indeed, the company is being given “refundable tax credits,” meaning these are cash giveaways, not tax reductions.

But the deal offers much more than this. Foxconn will get a state and local sales tax exemption on the cost of all building materials, supplies, and equipment and landscaping and lawn maintenance services, estimated to be worth $139 million.
But the deal offers still more. Local governments will be pressured to create special Tax Incremental Financing districts, and the subsidy is expected to be so massive that the Foxconn bill provides an exemption from the state law limiting the size of such districts and lengthens the statutory payback period from 20 to 30 years.

But the deal offers still more. The bill would exempt Foxconn from some state requirements on: (1)discharging dredged or fill material into a wetland; (2)water quality certification related to discharges into wetlands; (3)construction, placement, or maintenance of bridges or culverts in or over navigable waters; (4)construction, dredging, or enlargement of an artificial water body that connects with an existing navigable waterway; (5)grading or removal of topsoil from the bank of a navigable waterway; (6) public utility projects consisting of high-voltage transmission line relocations.

In short, Foxconn will be able to operate as a kind of outlaw company that can simply ignore laws that regulate every other business or individual in the state. And that is because it promises to create up to 13,000 jobs in return for accepting $3 billion in tax subsidies or $585 per person for every adult resident in this state, not including the additional TIF subsidies, which have yet to be tallied.

And what guarantee is there that Foxconn will create 13,000 jobs? None. The company could collect $345 million of the maximum $1.5 billion payroll credit for just the 3,000 jobs it promises to start with and grab the sales tax exemptions and TIF subsidies while using the $1.35 billion tax credit on capital expenditures to automate the factory and gradually lower the employment even further. With no penalty. And given the company’s reputation for embracing robotics at ever opportunity, that is surely the most likely result.

Murphy concludes, "But for every other legislator in the state, Republican or Democrat, there is no reason to vote for this unprecedented giveaway for a few thousand jobs, following a game plan that if applied to all businesses, would bankrupt the state and destroy its environment. This isn’t a sound conservative solution to economic development, it is fiscal liberalism run rampant."

David Haynes, of the Milwaukee Journal Sentinel, spoke with Kenneth Thomas about Foxconn and Wisconsin's subsidy package:

Kenneth Thomas, of the University of Missouri-St. Louis, has studied state and local subsidies for business and believes Wisconsin and other states hold more cards than might be evident at first glance. “Foxconn's fear of protectionism (probably well-placed) makes it want to be here, and the U.S. unemployment rate is finally well down, though we could certainly use wage growth. So my recommendation to Wisconsin would be, ‘Just say no,’ " he wrote me in an email. "There is no reason Foxconn should get a free facility plus whatever else it wants; what it wants most of all is to be in the United States. Moreover, a 3.1% unemployment rate is another reason for the state not to throw a lot of money at new jobs. ... If the state does yield to temptation, it should compare the proposed cost per job and percentage of investment paid by the subsidy package to packages given for other large manufacturing facilities, and try to spend less, given Foxconn's weak bargaining position.” And if the bidding gets too rich, the state should be willing to walk away.

Foxconn has done this song-and-dance before. They've gotten promises of millions of dollars and then failed to deliver the projects and the jobs. As Marjorie Kelly wrote, "Foxconn also has failed to deliver on similar deals in India, Vietnam and Pennsylvania." In 2013, Foxconn promised to invest $30 million and hire 500 workers in Pennsylvania, yet this has not materialized.

Luz Sosa listed the many broken promises of Foxconn, "In 2013, the company signed a letter of intent to invest up to $1 billion in Indonesia. Nothing came of it. Foxconn announced it would invest $5 billion and create 50,000 jobs over five years in India as part of an ambitious expansion in 2014. The investment amounted to a small fraction of that, according to The Washington Post’s Todd Frankel. Foxconn committed to a $5 billion investment in Vietnam in 2007, and $10 billion in Brazil in 2011. The company made its first major foray in Vietnam only last year. In Brazil, Foxconn has an iPhone factory, but its investment has fallen far short of promises. Foxconn recently laid off 60,000 workers, more than 50 percent of its workforce at its IPhone 6 factory in Kushan, China, replacing them with robots that Foxconn produces."

Sosa makes another great point, "Cyber component manufacturing with large numbers of employees has mainly occurred in low-wage, marginally regulated countries. Wisconsin can’t and shouldn’t compete with Vietnam and China for the lowest wages and intolerable working conditions."

The working conditions at Foxconn's factories are another cause for concern. As detailed by Jay Greene in Riots, suicides, and other issues in Foxconn's iPhone factories. "There have been employee suicides, explosions at two plants that make Apple gadgets, and reports of harsh working conditions."

As the New York Times reported, regarding Foxconn's Zhengzhou China plant, "The local government doles out more than $1.5 billion to Foxconn to build large sections of the factory and nearby employee housing. It paved roads and built power plants. It helps cover continuing energy and transportation costs for the operation. It recruits workers for the assembly line. It pays bonuses to the factory for meeting export targets."

Another big concern, for those questioning this giveaway, are the possible environmental issues. Air and water quality, and solid and hazardous waste standards, and wetland regulations should not be relaxed. Tourism is an important part of the Wisconsin economy. Wisconsin's lakes, rivers and woods are big business. To not only subsidize a company, but to then also allow them to degrade Wisconsin's environment is inexcusable. Foxconn should not be allowed to bypass an environmental impact statement (this is an analysis describing the positive and/or negative effects of a proposed project).

As Rick Barrett notes, "The electronics industry has been called a major source of environmental pollution, and its large presence in China and South Korea has raised concerns about the environment and the health of workers there. The industry uses dozens of chemicals and heavy metals, including lead, in its processes."

Greg LeRoy remarked, “The states are orchestrating a process that benefits large, politically connected corporations and harms small employers, which form the backbone of the economy … President Trump is also blessing the ‘buffalo hunting’ school of economic development, in which a few companies get huge ‘megadeals’ while programs that benefit many employers suffer budget cuts, and small businesses and entrepreneurs get shortchanged … the ‘war among states’ way in which the United States allows even foreign corporations to extract huge taxpayer subsidies is a troubling reminder of how federalism undermines economic development in America.”

“We can only describe this as a gift from Wisconsin taxpayers to Foxconn shareholders,” Mr. LeRoy said. “This is a guaranteed loser for the state.” LeRoy continued, "At that price, the deal is a sure loser for Wisconsin taxpayers. That’s because there is no way the typical Foxconn worker will pay $230,000 more in state and local taxes than she and her family will consume in public services over her work time there. At that price, the deal can only be accurately described as a transfer of wealth from Wisconsin taxpayers to Foxconn shareholders."

Wisconsin lawmakers have said the incentive package will be pro-rated on how many jobs the company creates and how much it spends. This sound like an admirable claw-back provision. But the devil is in the details, and unless the public knows the details, we can't really be sure there are any teeth in those provisions.

Scott Walker said, “We are calling this development ‘Wisconn Valley,’ because we believe this will have a transformational effect on Wisconsin just as Silicon Valley transformed the San Francisco Bay area.”

Another glaring miscalculation from our inept governor. If Silicon Valleys could be reproduced in state after state, it would have already been done. The idea that you can subsidize and bribe your way to a competitive advantage and establish a long-term business and growth model is ludicrous. Also, manufacturing doesn't pay what it used to, employment is declining, much of the work is being automated, and manufacturing operates practically tax-free in Wisconsin. So it doesn't make sense to pile subsidies upon tax breaks to a dwindling sector that doesn't even pay its fair share of taxes.

To paraphrase a University of Wisconsin-Milwaukee Center for Economic Development research paper:

The subsidization/tax-incentive contribution to local economic development has been wildly exaggerated. Although it has become almost a cliché to boast of becoming “the next Silicon Valley,” a review of the historical record reveals that the celebrated success stories of economic development are more the exception than the rule. Far more typically, the investments have had little discernible impact in reshaping the economic trajectory of cities or regions. Nor have they produced the internal returns envisioned by proponents. The case for the tax incentives as a “game changer” or “driver” of local economic development is more chimerical than compelling.

Jon Talton explained, "These are all reasons to be skeptical of subsidies that pick winners - typically multinationals with huge profits - at the expense of existing tax-paying companies... Wisconsin doesn’t have a world-class flat-screen cluster supporting tens of thousands of jobs that it needs to protect from poachers...The Wisconsin paradox is that Walker refused $810 million in federal help for a higher-speed rail line between Milwaukee and Madison. Why? Because it came from Obama and because Republicans have a strange anti-rail fetish (Florida’s and Ohio’s governors did the same). In addition to offering more transportation options - including one with far fewer greenhouse gas emissions - the rail project would have provided large numbers of construction jobs, as well as good operating and maintenance jobs. The trains would have been assembled there, too, with the potential of billions in contracts to build trains for other states."

But, of course, Scott Walker's dutifully endless ass-kisser, Christian Schneider can't see anything wrong with the deal. As usual, his article in the Milwaukee Journal Sentinel simply dug into Democrats and anyone else who would dare question this "great" deal. According to Schneider anyone that would raise concerns over this massive corporate welfare is a "member of the deranged lefty echo chamber rooting against the state's economic success."

Here again we can see the gigantic hypocrisy of Republicans. When Republicans are the ones doling out public dollars, it's warranted, needed, proper and, of course, it will be a huge success. But when Democrats want money for infrastructure, health care, education, poverty, Social Security, etc., they're just wasting taxpayers hard-earned dollars. Just imagine if Jim Doyle (Democratic governor before Scott Walker) had proposed giving billions of dollars to not only a private company, but a Taiwanese one at that. Republicans would have gotten out their pitchforks and torches and hailed Doyle as a pinko-commie, socialist, another tax-and-spend liberal, giving away taxpayer money.

Schneider seems to be of the economic development school which believes that any development is good development. He mocks those who question if these are good jobs or if they pay a living wage. I guess Schneider's message is, "A job is a job, so just take it, be happy and shut up!"

In passing, Schneider mentions, "The state has had a spotty record in providing tax subsidies to business." He doesn't go any further in his analysis. For Schneider, Walker, Republicans and their willing corporate welfare recipients, there is no need to analyze this deal - just get it done! Never mind this would be one of the biggest corporate giveaways in the history of the United States ... nothing to see here. As Walker has said, critics can "suck lemons." Now that's diplomacy!

In another Orwellian fever dream, Republican Party spokesman Alec Zimmerman said, "Governor Walker's reforms have taxpayers back in charge while liberals like Dana Wachs would take us back to the days of special interest control in Madison." Dana Wachs is a Democrat planning on challenging Scott Walker in the next gubernatorial election. Yet, how the Republicans can make the claim that Walker is putting taxpayers in charge and cutting off special interests all while hoping to give away one of the largest corporate welfare packages in our nation's history is dumbfounding.

As the New York Times informed:

Big companies like Foxconn possess leverage to extract concessions from state governments that smaller firms cannot, said Carl Davis, research director at the nonpartisan Institute on Taxation and Economic Policy in Washington. “This is not a comprehensive strategy for economic development,” he said. “If Wisconsin were going to offer this kind of subsidy for every employer within its borders, the state would be bankrupt.”

John McCormick, of Bloomberg, highlighted Walker's barefaced hypocrisy:

Walker’s embrace of taxpayer money for Foxconn is in conflict with his limited-government philosophy. He’s also previously backed public subsidies for a Milwaukee professional basketball arena and for Wisconsin-based companies such as Kohl’s, subsidies that would be described as "corporate welfare" by some in his party. “I believe people create jobs, not the government,” the governor said in an April 2015 speech in New Hampshire as he explored a presidential bid.

The New York Times also picked up on Walker's duplicity:

“It doesn’t fit with a governor that said we can’t spend much money,” said Martin Baily, a senior fellow at the Brookings Institution and a member of President Bill Clinton’s Council of Economic Advisers. “This is a guy who decimated the University of Wisconsin by budget cuts. On the one hand, he’s saying we can spend billions to pay Foxconn, but what about our own prized educational institution?”