Foxconn Factory Triggers Tax Bidding War Among Seven States

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Michael J. Bologna and Alex Ebert

Seven states are making pitches for a jobs bonanza promised by Foxconn Technology Group amid warnings from economists and regional planning experts for states to remain objective during the final stages of the escalating bidding war.

Politicians and economic development officials in Illinois, Indiana, Michigan, Ohio, Pennsylvania, Texas, and Wisconsin have had contact with Taiwan-based Foxconn, the world’s largest contract electronics manufacturer. Each state is presenting the company with incentive packages featuring tax credits, training programs, and infrastructure improvements that could accommodate Foxconn’s plan for a massive manufacturing campus.

Increasingly, however, Wisconsin is seen as the likely host for a Foxconn plant that is expected to employ between 5,000 and 10,000 workers to make display panels for televisions and other electronic devices. An announcement could be made before the end of the week.

On July 7, House Speaker Paul Ryan (R-Wis.) confirmed he had met with Foxconn officials at the direction of Gov. Scott Walker (R). Ryan pledged to work with his state officials to craft favorable terms for Foxconn to locate in southeastern Wisconsin.

President Donald Trump offered similar hints during a June 13 visit to Wisconsin. Trump said he was negotiating with a “major, major incredible manufacturer of phones and computers and televisions” for the development of a facility in the state.

Jobs Sweepstakes

Foxconn spokeswoman Ellin Choy wouldn’t confirm Wisconsin as the winner in the jobs sweepstakes. Choy, however, pointed to a July 12 statement on Foxconn’s expansion plans.

“Our company is conducting an evaluation of the conditions and potential locations for establishing manufacturing facilities in the U.S.,” Foxconn said. “While it is not currently possible to confirm the locations for those potential investments or estimate the number of jobs that might be created, it is expected that many direct and indirect job opportunities would be created with those new operations and throughout the supply chain in the U.S.”

Even if Wisconsin becomes Foxconn’s final choice, some of the competing states could figure into the company’s expansion plans.

Bloomberg News reported July 24 that Foxconn plans “sister plants” in other states that will use the panels to manufacture televisions and computer screens for Sharp Corp., the Japanese electronics and consumer products giant. Foxconn holds a controlling stake in Sharp. Bloomberg reported this broader expansion effort could result in an investment in the U.S. totaling up to $10 billion. Bloomberg BNA is an affiliate of Bloomberg L.P.

Several reports out of Michigan suggest the southeast region of the state could be a huge beneficiary of this second wave of development. The states have generally been secretive during the courting process, but Michigan has engaged in the most open recruitment campaign.

‘White Whale’ in Michigan

Kathy Achtenberg, public information officer with the Michigan Economic Development Corporation, confirmed with Bloomberg BNA July 25 that Michigan is still in the running for a Foxconn project.

Gov. Rick Snyder (R) openly advocated for a $200 million tax incentive program for big businesses over several months, saying the state needed another “tool in the toolbox” for attracting large employers such as Foxconn. After months of political jockeying and debate, the House passed the “Good Jobs for Michigan” package, which would reimburse Foxconn 100 percent of the taxes withheld from its employees’ paychecks if the screen manufacturer would deliver on 3,000 or more jobs.

Dozens of regional economic developers and politicians testified in support of the bill, often alluding to Foxconn as a “white whale” and that the state was in an “arms race” with neighbors for the working-class jobs the plant could bring. Birgit Klohs, president of western Michigan economic development group The Right Place, testified that the legislation was necessary to compete with tax breaks being offered by Milwaukee, Wis.

“Everyone wants that big fish. We must be competitive,” Rep. Leslie Love (D) said before the House voted. “Be bold enough to try something so radical that it just might work.”

The package only passed 71-35, with those on both the left and right questioning the value of the tax expenditure. The state has been dealing with the fallout of its MEGA tax credit program, which was seen as a failed attempt to use tax incentives to keep jobs during the Great Recession.

“Here we go again attacking the taxpayers. Here we go again giving money to a particular corporate class,” Rep. Martin Howrylak (R) said. “For liberals, this stands against everything you’ve advocated for.”

Freezing Wisconsin Budget

The bidding process in Wisconsin has largely been hidden from the public. However, the Foxconn question is interfering with the state’s efforts to enact a 2017-2019 biennial budget. Wisconsin’s new fiscal year commenced on July 1, but lingering questions about the price of the Foxconn incentive package have put the budget process on ice.

On July 20, two state senators close to the negotiations said the state hoped to strike a deal with Foxconn by the end of the month. Senate Majority Leader Scott Fitzgerald (R) and Sen. Luther Olsen (R) told reporters at the state capitol the budget negotiations had been delayed until a final agreement is reached with Foxconn.

Critics of state and local tax subsidies said Foxconn is likely playing states against each other, raising the possibility that they will “overpay” for the promised manufacturing facility.

Foxconn Controls the Process

Greg LeRoy, executive director of economic development research and advocacy organization Good Jobs First, said Foxconn is in the perfect position to leverage an aggressive incentives package, significantly cutting its initial investment in the project.

LeRoy noted Foxconn is coming into the U.S. market with little political or economic baggage, offering to create a large number of manufacturing jobs, and expressing indifference about where it needs to locate. Under these conditions, LeRoy said Foxconn is in the perfect position to pit states against each other to leverage the best possible deal. He predicted the winning state would pay a very high price for each job created.

“We would not be surprised if Foxconn doesn’t already know where it intends to go, or has a strong inclination toward one of the states,” LeRoy said. “We think they are using the other states to up the ante with the state it already favors. That would not be an unusual story.”

Subsidies Poker Table

Kenneth Thomas, a professor of international political economy at the University of Missouri-St. Louis, agreed and added that Foxconn is a very savvy player at the subsidies poker table.

Thomas said Foxconn is accustomed to rich packages of benefits for facilities it develops in China. Foxconn is also taking advantage of President Trump’s rhetoric about trade with China and demands for more domestic manufacturing. In this context, he predicted the winning state would be forced to offer an expensive subsidy package.

“I would almost suggest that a state should just say no. It’s going to be outrageous and expensive, and you only find out as the bidding goes on,” he said.

Thomas said the states are operating at a distinct information disadvantage, undermining their collective efforts. He suggested states begin to coordinate their bidding on economic development projects and create uniform standards for subsidies as is done in the European Union.

LeRoy said states probably have more power in the bidding process than they think.

LeRoy said Foxconn and other huge employers frequently tease state development officers with suggestions that they could locate anywhere. In reality, he said a wide variety of factors—beyond tax credits and subsidies—drive an expanding company’s location decision. He said states would be better off touting factors such as access to labor and natural resources.

“According to the IRS, all state and local taxes combined equal 2 percent of a company’s cost structure,” LeRoy said. “So business basics—labor, raw materials, logistics, energy, CEO bonuses—those variables absolutely dominate the decision-making process. Tiny changes in any one of them would dwarf anything you could do with tax breaks.”

To contact the reporters on this story: Michael J. Bologna in Chicago at mbologna@bna.com and Alex Ebert in Columbus, Ohio at aebert@bna.com

To contact the editor responsible for this story: Jennifer McLoughlin at jmcloughlin@bna.com

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