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Foxconn: Breaking Down a $3 Billion Incentives Package

As the “Wisconn Valley” special legislative session examines the structure, performance based metrics and magnitude of an incentives package tied to what would be the largest greenfield investment by a foreign company in U.S. history, it is paramount to understand the road to a $3 billion incentives package.

Q3 2017
The jubilation in Wisconsin could be heard over the collective groans in Michigan, Indiana, Illinois, Texas and Ohio as Foxconn, a multinational electronics manufacturer, unveiled their intent to invest $10 billion and create 13,000 jobs to establish a new manufacturing campus in Southeastern Wisconsin. Foxconn’s commitment marks the inception of the largest greenfield investment by a foreign company in United States history.

With the ink still wet on the Memorandum of Understanding between the State of Wisconsin and Foxconn, Wisconsin Governor Scott Walker has convened a “Wisconn Valley” special legislative session with the hope of approving a $3 billion incentive package for the Taiwanese electronics manufacturer.

As legislators begin to examine the structure, performance based metrics and magnitude of this incentives package, it is paramount to understand the road to a $3 billion incentives package. Simply put, it’s [Wisconsin’s Enterprise Zone program] the state’s secret weapon that can be deployed for ‘megaprojects’

The enterprise zone designation
The State of Wisconsin’s Enterprise Zone program is administered by the Wisconsin Economic Development Corporation (WEDC) and is enabled by section 238.399 of the state statutes. Simply put, it’s the state’s secret weapon that can be deployed for ‘megaprojects’. It’s important to understand that an Enterprise Zone doesn’t describe a specific geography, but rather describes a specific project.

The Wisconn Valley legislative language authorizes WEDC the ability to designate only one Enterprise Zone in the entire state as an ‘Electronics and Information Technology Manufacturing Zone’. Clearly this change is specifically and solely designed for Foxconn to create a ‘Super Enterprise Zone’. The below commentary is focused on the contrast between the current Enterprise Zone program and the ‘Super Enterprise Zone’ being proposed for Foxconn.

As currently constructed, companies in an Enterprise Zone can earn incentives based upon five separate categories; job creation, job retention, capital investment, supply chain impact and worker training costs. The current legislative proposal being elevated in the special session proposes for Foxconn to earn their incentive in only two of the categories listed above – job creation and capital investment. Currently in the Enterprise Zone program, companies can earn credits for up to a 12 year period; however the proposed legislation would add three years to Foxconn’s earning period.

The two words, ‘up to’ are not to be overlooked. Ultimately, WEDC negotiates each Enterprise Zone agreement based on the unique circumstances of each project. Statutory language such as ‘up to’ gives them the ability to negotiate up to that threshold, however it doesn’t guarantee those thresholds to any Enterprise Zone recipient. Furthermore, WEDC contracts require a multiyear compliance period following the completion of the project where companies provide annual reports authorizing that they have maintained their contractually required levels of employment and investment in Wisconsin.

Job creation incentive
At a high level, companies are rebated back a portion of their annual employee payroll in the form of refundable state tax credits. State statute currently allows for all employee wages between $30,000 and $100,000 annually to be included in the incentive calculation. The Wisconn Valley legislative proposal recommends adjusting the statutory language to allow up to 17 percent of employee wages to be eligible for incentives, rather than the 7 percent that is now on the books.

If Foxconn delivers on their commitment to create 13,000 jobs in Wisconsin at an average wage of $53,000 per year, they’ll earn $1.5 billion in refundable performance based tax credits based upon those job creation and wage metrics.

Capital investment incentive
As state statute stands today, designated companies in the Enterprise Zone program are eligible to receive an incentive of up to 10 percent of their total capital investments costs. Typically, the majority of capital expenditures are development, construction and equipment costs. The Wisconn Valley legislation would enable Foxconn to earn up to 15 percent of their capital investment costs in potential incentives.

If Foxconn delivers on their commitment to invest $10 billion to establish their new operation in Wisconsin, they will earn $1.35 billion in refundable performance based tax credits based upon that level of capital investment.

Performance based incentive
Enterprise Zone tax credits are designed to be performance based. If Foxconn spends the capital and creates the jobs that they have promised, they will receive the full incentive. If they leave the state before spending a dime, they won’t receive a nickel. The program’s structure and compliance reporting requirements are designed to intentionally protect tax payers from companies and projects that over promise and under deliver.

Refundable incentive
Similar to many other states, Wisconsin’s leading incentives programs, such as the Enterprise Zone, are structured as tax credits. Ultimately, the monetary value of the tax credits is calculated by a company’s employee payroll and level of capital invested. Tax credits offset a company’s corporate state income tax liability; however the Enterprise Zone incentives are refundable tax credits, meaning if the amount of the company’s tax credit exceeds the amount of their corporate income tax liability, that excess amount is refunded to the company.

Sales tax exemption
If you are keeping score at home, we still need to account for another $150 million on the road to $3 billion. This is proposed in the form of sales and use tax exemptions of up to $150 million. This would essentially function as a sales tax holiday within Foxconn’s Enterprise Zone. While operational considerations drive location decisions in our experience, Wisconsin will need to maintain focus on finalizing their incentives package to see the project come to fruition.

Tax increment financing
The Wisconn Valley legislation proposes additional flexibility to municipal governments that allows them to enhance their utilization of Tax Increment Financing (TIF).

TIF is used in 49 states nationally and is often the most powerful municipal tool in incentivizing development projects. It’s a program that is creatively and strategically deployed throughout Wisconsin. At its core, TIF is designed to capture the future property taxes generated from new development to assist in offsetting project costs such as utility extensions, roads, infrastructure, land acquisition and other development costs including business incentives.

Similar to the proposed modifications of the Enterprise Zone, the Wisconn Valley language creates a new category of TIF with a designation that is solely designed for Foxconn. Rather than capturing 20 years of future property tax revenue, these modifications would enable the municipality through its TIF program to capture over 30 years of future property tax revenue.

It’s important to note that this special legislative session potentially affords additional flexibility for a ‘Foxconn TIF’ designation; however the final approval of the use, length and eligible costs of a TIF is proposed and approved by local governmental bodies.

The bottom line
Incentives often play a leading role in mitigating cost deltas and can help in bringing projects to life that otherwise would be financially unfeasible. In our experience working as national project finance consultants, we would be surprised if numerous other states didn’t offer incentives in the same ball park as Wisconsin.

Foxconn’s decision to place this generational investment in the “Wisconn Valley” undoubtedly balanced the consideration of competing incentive offers with non-fiscal considerations such as access to markets, strong workforce, business climate and quality of life. While operational considerations drive location decisions in our experience, Wisconsin will need to maintain focus on finalizing their incentives package to see the project come to fruition.

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