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Why tax breaks for iffy jobs are bad economic development

Recently, President Trump announced a deal with Taiwanese-owned FoxConn for 3,000-plus jobs in a new Wisconsin factory making liquid crystal display panels.

The bill for Wisconsin taxpayers? $3 billion over 15 years, $200 to $250 million annually in foregone state and local tax payments. Wisconsin will also provide infrastructure, public services and training grants at a cost yet to be revealed. The Governor also hopes to liberalize the state's tax increment financing to enable a massive new TIF district for the plant, which could add hundreds of millions of dollars more in taxpayer costs. Existing Wisconsin companies and households will face higher taxes, poorer public services, or some of both, as a result.

Yet for all that, the plant may never be built.

"FoxConn has a relatively bad track record on following through," wrote Tim Culpan in Bloomberg Businessweek. In 2013, the company announced plans to build a $30 million plant in central Pennsylvania that never materialized. In 2014, it signed a deal in Indonesia to build a $1 billion plant in Jakarta that fell through, too. Culpan concludes, "Wisconsin isn't building the American Dream — America is building the Foxconn machine."

In Minnesota, we've had many disappointing experiences with such deals. Programs designed to encourage rural and small town plants ended up subsidizing suburban metro sites instead. Despite their stated legislative intent, they were granted more often to large firms than small ones.

Tax incentives are unfair to existing firms in the same market. Gander Mountain, for instance, a Minnesota-based sporting goods company, begged the state legislature to deny tax increment financing (TIF) to subsidize Bass Pro and Cabela's moves into the state — it didn't happen. This unfair competition — tax breaks not offered to the Minnesota competitor — is a major cause of Gander Mountain's current difficulties.

Generous tax incentives also shift the burden of paying for the public services required by new establishments to existing firms and households, most of whom gain nothing from the jobs. Indeed, the southeastern Wisconsin plant, should it materialize, is likely to hire many of its workers from across the line in Illinois.

Researchers, including many public accounting professionals, oppose these kinds of giveaways. In 2004, I convened a national conference on business tax incentives at the University of Minnesota. In our book, "Reining in the Competition for Capital," we call for a unified state economic development budget that would enable legislators, journalists and the public to clearly see how these tax expenditures (as economists call them) compare with tax money spent on other economic development tools.

Place and people-based investments should be favored in structuring deals over company-based assets that can be removed or destroyed if the business decamps. Benefits should be performance-based: paid out only after the business has produced the jobs it's promised. Incentives should be awarded only for the first few years and not extended far out into the future. All deals should include clawbacks that require repaying the state in the case of shortfalls, and these should be vigorously enforced.

Sunshine, we concluded, is the best antiseptic. All incentives should be fully disclosed. Minnesota was a 1995 early leader in this regard, but fell behind as online disclosure became the norm, starting in 1999 in Ohio. All incentivized jobs should be monitoring to ensure the quality of jobs created and that they do not displace existing businesses' income and jobs. Site consultants, who sometimes "work both sides of the street" and sometimes work on commission, should be registered and regulated as lobbyists.

A broad coalition, led by the nonprofit Good Jobs First, has also promoted safeguards such as money-back clawback provisions. One city even stopped a plant closing by suing to prevent the removal of subsidized machinery in Duluth in 1988. In 2016, in another win for taxpayers, the Governmental Accounting Standards Board began requiring that states and localities report the costs of corporate tax breaks, including foregone state and local property, income and sales tax revenues.

What does work to create jobs? Intervening to help existing companies large and small through hard times is a better use of resources and more likely to save good jobs than asking taxpayers to foot the long-term bill for a speculative new venture. So is nurturing local entrepreneurial firms with good employment prospects.

Training programs — like those that Minnesota is pioneering to connect state and community college curricula with employers' needs — are a much better (and vastly cheaper) way to create and maintain jobs. So are investments in research on new technologies. Taconite is an excellent example, a university-initiated process that has sustained jobs on the Range for decades. And expanding our high school curricula to teach manufacturing skills like welding, environmental assessment, sewing, and other skills that will help existing Minnesota businesses thrive.

The Trump administration, meanwhile, is investing in publicity-driven deal-making while it undercuts some of the best federal programs in job creation. Greg LeRoy reports in Fast Company that the Trump budget proposes to eliminate the Manufacturing Extension Partnership, "a longstanding and successful program with bipartisan support that helps small-and medium-size manufacturers adapt to new technology."

Understanding how complicated deals work can be mind-numbing for citizens, but improvements in transparency and report procedures will make it easier.

Above all, be skeptical, especially of the biggest, flashiest deals.


Sources and further reading:

• Tim Culpan, "America and the Foxconn Dream: This package could buy an iPhone for everybody in the state." Bloomberg Businessweek, July 27, 2017

• Ann Markusen and Kate Nesse, eds. Reining in the Competition for Capital. Kalamazoo, MI: Upjohn Institute for Employment Research, 2007

• Greg LeRoy, "Foxconn's $3 Billion Tax-Break Deal Is A Loss for Smart Jobs Policies." July 29, 2017

• Greg LeRoy, The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation. San Francisco: Berrett-Koehler Publishers, 2005. Free online at " target="_blank">