By Cara Lombardo
Wisconsin's $3 billion bid this summer to land Foxconn
Technology Group's first major U.S. factory looked smaller than
that of a neighboring state's, but included an increasingly popular
feature that likely made the difference: cash.
Cash incentives are likely to come up as Amazon.com Inc. weighs
dozens of offers that were due this week from cities eager to house
its second headquarters, experts say. It could also be a factor for
cities looking to land a possible second Foxconn plant.
Amazon declined to comment, but its request for proposals asked
that state and local government bidders indicate whether tax
credits offered in exchange for investment and job creation will
include cash refunds.
Michigan tried to lure Foxconn, a Taiwanese technology giant,
with an incentives package totaling $3.8 billion, or 27% more than
Wisconsin's record-breaking package, according to documents
reviewed by The Wall Street Journal. Michigan's offer also would
have required fewer jobs to be created than the final offer from
its neighbor.
But Michigan's plan relied heavily on credits that would reduce
Foxconn's tax bills, an approach that has fallen out of favor as
large companies increasingly gravitate toward offers like
Wisconsin's that come with cash.
"It's a very shiny component and it's easy to quantify," said
Paul Gevertzman, a tax partner at Anchin, Block and Anchin LLP, who
specializes in economic development. "Regardless of your situation,
even if you have no tax to pay, even if you have a loss, you get a
check back."
Ten years ago, few states' primary economic development tools
were refundable, a feature that allows businesses to receive cash
payments for unused tax credits and incentives, said Jay Biggins,
executive managing director at consulting firm Biggins Lacy Shapiro
& Co.
Today at least 19 states, including Wisconsin, have such
programs, according to research by Mr. Biggins's firm. Michigan
doesn't.
"These programs are powerful," said Mark Sweeney, a senior
principal at McCallum Sweeney Consulting, whose firm helps
negotiate deals for companies including Northrop Grumman Corp.
"They impacted the Foxconn decision and they will impact the next
Foxconn decision."
Traditional tax credits are valuable only to the extent that a
company has a tax liability. Other credits can be sold, but usually
at a discount. With refundable benefits, though, states promise
cash payments for unused tax credits, making them useful to
companies in a wider range of circumstances, including those that
show little income or are already eliminating taxes owed through
other tax breaks.
Refundable credits, sometimes described as paying for jobs, can
be a hard political sell.
Wisconsin's 15-year deal, which could cost taxpayers roughly
$15,000 for each Foxconn employee each year, drew criticism from
Democratic lawmakers as well as the conservative group Americans
for Prosperity, all of whom said that the cost was too high. And a
state analysis found taxpayers wouldn't recoup their investment
through increased tax revenues until the fiscal year ending
2043.
Wisconsin State Sen. Jon Erpenbach, a Democrat, said taxpayers
may never be fully reimbursed if Foxconn automates jobs in the
future.
He cautioned other states against rushing into similar
deals.
"You might as well start writing checks and hope that those jobs
come in the end," Mr. Erpenbach said. "If they don't, you're going
to be out a lot of money to build a really nice facility for robots
to work in."
A spokesman for Gov. Scott Walker defended the deal, describing
it as "pay-as-you-grow," meaning the state will pay incentives as
Foxconn builds facilities and creates jobs.
Foxconn in a statement said many factors guide its decisions
about where to do business, and investments made by state and local
governments are certainly considered.
Michigan's final offer for Foxconn's flat-screen factory assumed
the company would spend $6.1 billion and create 8,800 jobs,
compared with the 13,000 jobs Wisconsin negotiated, according to a
June 25 letter from the Michigan Economic Development Corporation
obtained by the Journal in an open records request.
Michigan officials proposed building the project in Marshall, a
small community about 100 miles west of Detroit. The bulk of the
offer's value came from tax credits, some of which are already
written into state law, the records noted. Several of the cash
incentives, which totaled $723 million, would have required
legislative approval, the records showed.
Wisconsin's final offer promises Foxconn as much as $2.85
billion in cash refunds over the next 15 years to offset portions
of its payroll and building costs. Because Wisconsin already waives
many taxes for manufacturers, Foxconn is guaranteed cash payments.
Only a small portion of the offer, a $150 million sales tax
exemption, wouldn't be paid in cash.
A spokesman for the Wisconsin Economic Development Corporation
declined to comment on the negotiations or say the how large of a
role the cash payments played.
"Wisconsin's offer was in the ballpark with other states," he
said.
At least one state, North Carolina, had a substantially smaller
offer for the project, proposing $570 million in state incentives,
records from that state show.
Several states, including Wisconsin, Michigan, North Carolina
and Pennsylvania, also prepared bids for a potential second Foxconn
project, according to documents reviewed by the Journal. The
location of that project hasn't been announced.
Wisconsin, meanwhile, this week delayed a vote to finalize the
project planned for Racine County after an issue surfaced
concerning the contract's requirements of Foxconn. Gov. Walker has
said he is confident the two sides will reach an agreement.
Competition is fierce among cities across the country for
Amazon's second headquarters, estimated to bring up to 50,000 new
jobs. As New Jersey Gov. Chris Christie unveiled an offer Tuesday
that included $5 billion in state tax incentives for the company to
come to Newark, N.J., the Republican dared other states to top
it.
New Jersey doesn't currently have a refundable incentive
program. Officials with the governor's office and the New Jersey
Economic Development Authority declined to say whether the offer
assumed a state legislature would enact one.
--Coulter Jones contributed to this article.
Write to Cara Lombardo at cara.lombardo@wsj.com
(END) Dow Jones Newswires
October 20, 2017 14:05 ET (18:05 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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