Tuesday, August 8, 2017

Foxcon costs keep rising- over $600 mil in next budget

You may have seen reports like this one that came out today, which discuss state agencies releasing their fiscal reports for the Foxconn incentive package.
Foxconn’s state tax credits would max out at $312.4 million annually from 2023 to 2026 before tailing off, according to a Department of Revenue analysis of the $3 billion special session bill now before lawmakers.

The agency’s projections show Foxconn would get more than 40 percent of the nearly $3 billion in state tax breaks over that four-year period if it builds a planned $10 billion facility in Wisconsin and hits 13,000 employees.

The Taiwanese electronics manufacturer is in line for $1.5 billion in payroll credits for $9.5 billion in payroll over 16 years plus $1.35 billion for capital expenditures projected to be $10.7 billion over five years, according to an agency analysis on the package’s fiscal impact.
That Wispolitics story gets the topline numbers correct, and most media analysis has fallen along those lines. But it fails to mention that the price tag in the short term could be even higher than that before we hit 2023.

If you go inside the Department of Revenue’s analysis (which deals with the tax writeoff part of the Foxconn package), you’ll see a few other details that aren’t mentioned in the Wispolitics article, and a few other items that are worthy of deeper discussion.

1. Given the structure of the Foxconn incentives, up to $1.5 billion of the $3 billion in writeoffs could come through construction of the campus's buildings and related activities, and would come in two forms. The first is a 15% credit for all “significant capital expenditures” in the new Foxconn enterprise zone. The DOR estimates that the tax credits for Foxconn will start to be submitted in Fiscal Year 2019-2020, reflecting construction in 2018 and 2019, and that Foxconn would take $192.85 million a year in each of the next 7 years (keep that assumption in mind).

In addition, the Foxconn package has an additional write-off for sales taxes on building materials, supplies and equipment that would be part of the construction of the Foxconn facility. The DOR estimates this to total $139 million over the 4 years spent building the facility. Using the construction expense schedule in the DOR’s document, the breakdown by year would be roughly 10% in Calendar Years 2018, 40% in 2019 and 2020, and the last 10% in 2021. This means that around 70% of this sales tax exemption would happen during the 2019-2021 budget cycle, which comes to $97.3 million for that time period.

As a side note, in the Legislative Fiscal Bureau’s analysis of the deal, they say the net effect of the sales tax exemption on the state’s bottom line is $0, because it’s specifically for the Foxconn development, and if it doesn’t happen, there’s no writeoff to be had. But for now, I am looking at the total amount the state is paying toward the development, so we’ll leave that total in there (and the LFB would definitely count the cost if you were putting up a new building at UW-Madison, so what's the difference if we're giving a tax break for certain activities related to other subsidized construction).

2. For the jobs part, the DOR goes along with the Walker spin of “13,000 jobs at $53,000+ average” once the Foxconn facility is fully running. But it takes a while to get there.

Estimated Foxconn-related employment at $53,000 average salary
2017 256
2018 2,600
2019 6,500
2020 10,400
2021 and beyond 13,000

My guess is that the earlier jobs are managerial oversight and the plan would be to slowly work in the number of Foxconn hiring until all the materials and infrastructure are set and ready to go. What this will have the effect of doing is delaying the full effect of this jobs credit until 2023- out of the range of the 2019-21 budget. But there still would be plenty of money handed out in those 2 years - $23.8 million in 2019-20 and $59.5 million in 2020-21.

3. In addition to the Foxconn enterprise zone, the bill creates a new targeted giveaway to Brookfield’s Fiserv Corporation, to try to make sure they keep their headquarters in the Milwaukee area. That would be $2 million a year in the next budget (up to $10 million over 5 years). Also, the bill allows for another 5 enterprise zones to be created throughout the state, which would raise the amount paid out by all enterprise zones by $24.75 million in the 2019-21 budget (the LFB and DOR do not say where those sites are).

4. In addition, the state’s General Fund would pay the additional work on I-94 south of Milwaukee, and LFB describes the payoff schedule this way.
It is expected that, if partially issued in May, 2018, estimated debt service on the $252,400,000 in contingent GPR-supported bonds that would be provided under the bill would increase by $2,942,000 GPR in 2018-19. If fully issued, estimated general fund-supported debt service payments on these bonds would increase to $8.91 million GPR in 2019-20, $15.67 million GPR in 2020-21, and $19.5 million in 2021-22, before plateauing at $20.3 million in 2022-23 through 2037-38. Debt service on these bonds would begin to decline in 2038-39 and would be fully repaid by 2042. Total estimated debt service during this period would be equal to $408.3 million. These estimates and the repayment schedule assume a 5% interest rate and 20-year bond maturities.
So add another $24.6 million to the bill for the 2019-21 budget, and let’s add it up for the 2019-21 budget for the Foxconn project, based on these estimates from the DOR.

Capital expenditures $385.7 million
Sales tax exemption $97.3 million
Jobs exemption $82.3 million
FiServ, other new enterprise zones $28.75 million
I-94 debt service $24.6 million
TOTAL COSTS 2019-21 $618.65 MILLION

Even scarier is that this cost could go even higher than that, and if anything, Walker's DOR is soft-pedaling what could happen as the Foxconn facility is being built. There is no mention of limitations on tax credits for either capital expenses or job write-offs in a given year. It gives time limits of 15 years for the jobs tax credit and 7 years for the capital expenditures credit. But it doesn’t give limits on how much can be taken in a given year, outside of the total amount Foxconn can get.
(a) The corporation may not issue certifications to claim tax benefits under [Foxconn jobs tax credit] that total more than $1,500,000,000.

(b) The corporation may not issue certifications to claim tax benefits under [capital expenditures] that total more than $1,350,000,000.
That makes DOR’s assumption that Foxconn would spread these credits out over the maximum amount of years very risky. What’s stopping from Foxconn from taking all of the $1.35 billion that it can write off as soon as it can, which would be by 2022 or 2023 (if we assume the campus is basically done by 2021)? This would make the hole in the 2019-21 and 2021-23 budgets even larger than DOR's analysis assumes.

Now maybe the Foxconn gamble pays off, and there ends up being enough added jobs and population to make this massive giveaway pay off in the long run (I’ll talk about that part and the LFB’s predictions on it in a future post). But it seems more likely to me that the Fox-con would send a state that already has a $1 billion structural deficit for the 2019-21 budget closer to a fiscal crisis, which could lead to job-limiting austerity in much of the rest Wisconsin. That's before we even account for the likelihood of some kind of recession hitting in the next 4 years, which would drive the deficit even higher.

The more we learn, the more we see that this Fox-con isn’t worth the large price that much of the state will have to pay. It doesn’t work fiscally, and people who care about Wisconsin's future should JUST SAY NO unless the near-term price tag is massively reduced. And even then, it's still an iffy proposition at best.


  1. Many thanks, Jake, as we are all limited by not having information to make an honest vote on a questionable bill.

    It's not that I'm against development, which is always needed, but how it can be done to benefit all people. Wisconsin needs tax money to support our commons, be it schools, roads, environment, health services, etc.

    This bill, the more we find out about it, is a GOP-imposed disaster for the future of our State. Sen. Vinehout on the Gousha program Sunday noted that the bill front-loaded money to Foxconn, which would have awful impacts on the rest of our fiscally-strained budget.

  2. "the bill creates a new targeted giveaway to Brookfield’s Fiserv Corporation"

    Didn't see that in a draft of the bill I read last week...has it changed, or was it cleverly disguised in there?

    Figured other companies would jump on the bandwagon...

    1. It's written in generic language, but targeted in a way that it only applies to FiServ.

      And you are correct, if this Fox-con goes through, you can bet many other companies will be asking for their own enterprise zone and similar handouts.