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As Foxconn breaks ground in Wisconsin, the costs to taxpayers go up 6/27/2018

6/27/18 – The Wall Street Journal

State, municipalities have pledged nearly $1 billion in sweeteners on top of initial $3 billion incentive package to lure manufacturer.

The incentives offered by Wisconsin and its municipalities to Taiwan’s Foxconn Technology Group since it announced a $10 billion megaplant in the state have gone up by nearly $1 billion.

The company will break ground in southeastern Wisconsin Thursday in a ceremony expected to feature President Donald Trump, almost a year after the deal was announced in a White House ceremony as a success in the president’s efforts to bring manufacturing jobs back to America.

The Apple Inc. supplier, formally known as Hon Hai Precision Industry Co., promised to open a 20 million-square-foot complex that would build liquid-crystal display panels and committed to creating 13,000 jobs in the state over several years.

In return, Wisconsin offered $3 billion in financial incentives.

In an effort to land the plant, municipalities months later added their own sweeteners. The town and the county where the facility will be built, Mount Pleasant and Racine County—south of Milwaukee—offered a $764 million incentive package. And Wisconsin added another $134 million to the tab to improve state highways and local roads in the area around the Foxconn site.

The state is on the hook for 40% of the public bonds that finance the local expenses if the project flops.

Ballooning costs underscore how expensive and unpredictable such projects can become for states and cities eager to attract new investments and jobs. Currently 20 states and cities are vying to win Amazon.com Inc.’s second headquarters, which promises a $5 billion investment and 50,000 well-paying jobs. New Jersey and the city of Newark have offered as much as $7 billion in tax incentives, while Maryland has offered $5 billion.

SWEETENED
Local incentives announced on top of an initial package from the state of Wisconsin have increased the cost to taxpayers:

INITIAL PACKAGE
$2.85 billion in income tax credits for job creation and capital expenditures
$150 million in sales-tax exemption
ADDITIONAL INCENTIVES
$764 million in local incentives
$134 million in state and local road improvements

Greg LeRoy, executive director of Good Jobs First, a group that advocates against the use of economic incentives, said unexpected costs can often creep up with large projects that receive money from multiple government entities.

“It’s just a lot of different parts of the story you have to put together and that’s why the costs keep unfolding,” he said.

State Democrats have attacked the governor for the deal, saying it is too expensive and the process by which the state promised billions to Foxconn lacked transparency. They have also raised concerns that Foxconn won’t fulfill its promises.

“The governor and the company are playing fast and loose with the numbers,” said State Minority Leader Gordon Hintz, an Oshkosh Democrat.

A spokeswoman for Wisconsin Gov. Scott Walker said Democrats were “desperately trying to undermine” the deal. She also said the Foxconn investment is a “once-in-a-generation opportunity to enter Wisconsin into the world’s high-tech economy.”

Mark Hogan, chief executive officer of the Wisconsin Economic Development Corporation, the agency responsible for negotiating the contract with Foxconn, said the process was “very transparent” and noted that the state had a personal financial guarantee from Foxconn Chairman Terry Gou to pay back part of the costs to the state if the company doesn’t fulfill its promises. The company is responsible for paying back the rest of the costs.

Foxconn said in a statement that it is “fully committed to this significant investment and to meeting our contractual obligations with the relevant government agencies.”

The bulk of Wisconsin’s initial deal with Foxconn included $2.85 billion in tax credits if the company fulfills its promise on hiring and capital investment and $150 million in sales-tax exemptions. The Republican-controlled state assembly passed legislation approving the financial incentive package in September.

An independent state fiscal analysis at the time found Wisconsin taxpayers would recoup the investment in the 2042-43 fiscal year.

In October, Mount Pleasant and Racine County said they would provide a separate incentive package worth $764 million. The funds will pay upfront infrastructure and other local costs connected with the project in part by diverting future property tax revenue. It also includes a $100 million payment to Foxconn if it meets all of its commitments.

In addition to Racine’s bid, Foxconn had received a bid from nearby Kenosha. John Antaramian, the mayor of Kenosha, said he decided to pull out of the bidding for Foxconn when he couldn’t make the project worth the money the city would have needed to invest. He also said the state should have negotiated the local package together with the statewide package to ensure cities weren’t negotiating against each other and provide consistency to the costs across localities.

“From my perspective, it should have been done together,” he said.

Nathan Jensen, a professor at the University of Texas at Austin who studies economic incentives, said negotiating a state deal separately from a local deal is particularly “bad practice.” It can put pressure on a locality to offer a large incentive package and also pits local communities against each other after the state has already had its own bidding war with other states.

Mount Pleasant and Racine County forecast all the costs will be recouped over a 25-year period through property taxes and other payments made by Foxconn, according to a spokesperson.

“The local governments crafted a careful and conservative investment package that ensures that all of the local infrastructure costs are fully funded through Foxconn’s investments, protecting taxpayers and fully capitalizing on this once-in-a-generation opportunity for our community,” said Jenny Trick, executive director of the Racine Economic Development Corporation, in a statement.

The Wisconsin Economic Development Corporation’s Mr. Hogan said the state decided to announce the plans before the local deal was worked out in order to get legislation on track because Foxconn made clear that avoiding unnecessary delays was important.

In November, the state added another $134 million to improve the roads surrounding the Foxconn site. An analysis by the nonpartisan Legislative Fiscal Bureau determined as much as $90 million is being taken from other projects to fund the improvements through the current budget period.

Craig Thompson, executive director of the Transportation Development Association of Wisconsin, said the state’s roads are already significantly worse than their Midwestern peers.

“We don’t have enough revenue to keep moving money around at the expense of other parts of the state,” he said.

Write to Shayndi Raice at shayndi.raice@wsj.com