FoxConn Project Poses Unasked, Unanswered Questions for Local Officials

Much has been written about state incentives to bring high-tech manufacturer FoxConn to Wisconsin.   Little has been written about proposed local incentives.  The local commitment will likely be significant, so what follows are a few questions that local officials may want to consider.

A Foxconn TID?

The FoxConn plant would be located in a tax incremental finance district (TID) in a Racine or Kenosha county municipality. A TID allows a municipal government to borrow by issuing bonds to pay for infrastructure, such as roads, lighting, sidewalks, and sewers in the district. In some cases, the local government can also provide cash incentives to a developer.  Over the next 20 or so years, property taxes collected within a TID are mostly used to repay borrowing.  Pending legislation asks lawmakers to extend the life of a Foxconn TID to 30 years.

Questions for Locals

Typically, the process of approving a TID takes months or years. Given the desire to place the FoxConn project on a fast track for approval, these questions take on additional urgency.

Q1:  How much local investment will be needed, and do the one or two participating municipalities have the fiscal capacity to handle such a large investment?

State officials have said the FoxConn “campus” is expected to be at least 1.58 square miles, or roughly the size of Belleville in south central Wisconsin.  While the plant would occupy a major part of that area, the district would still require significant infrastructure, especially since the plant is likely to be built on undeveloped land.  The project could require a record amount of local investment—and borrowing—but how much?

Q2:  How risky would this unusual TID be?

Most TIDs are “successful”:  Property taxes collected over the life of a district are sufficient to pay off borrowing.  A FoxConn plant would likely be a boon to the region and the host municipality.  The plant and other businesses created in the TID could generate billions in tax base sufficient to repay the municipal investment.  A recent TID created in Verona for Epic Systems was repaid ahead of schedule and provided a tax windfall to local governments in the area.

That said, some TIDs are not successful. If the TID does not generate enough tax revenue, local taxpayers are responsible for remaining debt.  One concern with a high-tech TID is rapid change.  What if technology leapfrogs FoxConn, and it is left with an obsolete product and a plant it must abandon?  Is a plant the size FoxConn proposes marketable to another buyer?  If not, would its value drop significantly? Would tax revenues be insufficient to repay municipal investment in the TID?

Q3:  If a local TID fails, what happens? Does the state pick up the tab?

The governor and state legislators propose to partially protect municipal taxpayers from a failed TID.  If pending Foxconn legislation is approved and a local TID fails, the state would have a “moral obligation” to pay up to 40% of municipal investment.  Should lawmakers commit to absorbing local borrowing costs, regardless of project size?

Q4:  A final question relates to timing:  How long will it take for local government to approve a TID?

State officials say FoxConn would like to break ground as soon as possible.  According to the state Department of Revenue, the process of creating a TID takes a minimum of two months. With Foxconn needing 1,000 acres of contiguous land, would a TID require a longer period of time for a municipality to design, approve, and implement such a large and complex TID?  Given the magnitude of the project, might local officials in a small community less experienced with TIF need extra time and advice to do their due diligence?  In short, can a sound, workable TID plan be developed and a district created in the short time state officials envision?

As the project moves from concept to implementation, many of these questions may be answered. But given the stakes involved—with jobs, tax incentives, and a potentially huge impact on the communities involved—local officials would do well to keep them in mind.

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Some Thoughts on the Trump Tax Proposal

The President’s tax proposals are drawing attention from the media, politicians, and the public. They offer potential for major change, but still lack detail. Tax legislation is complicated, and details ultimately matter. Nevertheless, the early ideas merit a few observations.

The Committee for a Responsible Federal Budget (CRFB) had a short but wise take on them. On the positive side, the tax proposals are a step toward needed simplification of a convoluted tax code. There are huge hidden compliance costs associated with complexity that Americans bear every year in paying attorneys, accountants, and software professionals.

It is also widely recognized that the U.S. needs a lower corporate tax rate to be competitive with other countries―and to stop the exit of American corporate headquarters. Such a move would help “repatriate” corporate profits whose American taxation is being deferred while “abroad.” We also need a tax code that is economically neutral and, therefore, more conducive to economic growth. The American economy is slow-growing; increased growth pays dividends in terms of more job opportunities and government revenue.

On the negative side, the CRFB is justifiably concerned about the tax plan’s impact on U.S. debt, which is already hitting $20 trillion and counting. With Social Security, Medicare, and Medicaid all facing cuts in the next 15 to 20 years and federal borrowing costs climbing, any tax plan has to be real reform that doesn’t balloon the debt and damage the economy.

From a state perspective, the tax package’s proposed loss of the federal deduction for state-local taxes could adversely impact states with high income and property taxes. In both cases, Wisconsin’s are 15 to 20% above the national average.

However, there are other points to keep in mind. First, the proposed doubling of the standard deduction will reduce itemizing, which less than a third of filers now do. Second, significant tax-rate reductions cannot be ignored. The combination of lower rates, a higher standard deduction, and fewer itemized deductions could still mean savings for a number of “typical” taxpayers. Loss of a deduction does not always mean a tax increase.

Critics of the state-local tax deduction ask an important question: Should the federal government and taxpayers across the country subsidize spending in states that have relatively high taxes? In effect, current federal policy encourages states to spend more, with the majority of extra costs falling on state residents, and not on the federal government.

Opponents of the state-local tax break also argue that the IRS code with its deductibility of income and property taxes rewards states for maintaining unbalanced tax systems that overtax income, work, and saving while encouraging wasteful consumption. One recent poll on this subject showed Wisconsin residents were far more favorably disposed to the sales tax than to income and property taxes, even calling it “more fair” than the other two.

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Lottery Advertising: You Be the Judge. Or the Statistician.

Wisconsin state budget bills are usually 1,000 or more pages in length and contain many small items that receive little or no attention.  That is not to say, however, that serious questions cannot arise from the minutiae.

One example from the new 2017-19 budget makes the point.  In the Department of Revenue section of the 632-page “Executive Budget” book is this request:

“The Governor recommends increasing the lottery general program operations appropriation by $3 million in each year to be spent on current and additional informational activities to maintain and increase overall ticket sales.  This will ensure continued property tax relief for Wisconsin homeowners through the lottery and gaming credit.”

At the same time, the Wisconsin state constitution, Art. IV, Sec. 24 (6)(a) reads:

“The expenditure of public funds or of revenues derived from lottery operations to engage in promotional advertising of the Wisconsin state lottery is prohibited.  Any advertising of the state lottery shall indicate the odds of a specific lottery ticket to be selected as the winning ticket for each prize amount offered.”

According to Merriam-Webster, advertising is “the action of calling something to the attention of the public especially by paid announcements”; the definition of promotion is “the act of furthering the growth or development of something.”

How do you reconcile the budget’s $6 million biennial spending request and Article IV, Section 24?

If you’re not legally inclined, consider some statistics.  According to a mid-2016 report from the Legislative Audit Bureau, the Wisconsin lottery spent about $7.5 million on “product information” in each of the prior three fiscal years.  During this same period, growth in lottery sales averaged 0.7%.

In 2003, the lottery spent $4.5 million on product information and generated $96.68 in sales per dollar spent.  In 2008, it increased informational spending to $7.5 million and sales per dollar were $65.96.  Since then, informational spending has remained unchanged and sales per dollar averaged about $70.

Given this abbreviated history, how do you evaluate the relationship between informational expenditures and lottery sales?

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