Tax credits and other incentives for economic development are not a new concept. Most states have statutorily-authorized incentives of some sort that are offered by state and local governments for private economic development projects.1 There are at least 1,800 different incentive programs offered across all 50 states.2
While economic development incentives are common, projects involving $1 billion or more of incentives – often called “Megadeals” – are much less common. As of 2017, only 18 deals nationwide involved $1 billion or more in state and local incentives, and only three involved $3 billion or more.3 Before this September, Wisconsin’s largest development incentives package was $115-$123 million for Mercury Marine, and involved state tax credits, a county loan, and a number of smaller incentives.4
com c.buchko cbgwi Cynthia Buchko, U.W. 2000, is the general counsel of Construction Business Group, Madison, a joint labor-management organization protecting the interests of 19,500 construction workers and 3,200 contractors.
The 2017 August Special Session Engrossed Assembly Bill 1, as amended by the Senate5 (FoxConn Bill), was passed by the Senate on Sept. 12, the Assembly on Sept. 14, and signed by Gov. Scott Walker on Sept. 18 – an astonishingly fast pace given the bill’s complexity.6
The FoxConn Bill provides up to nearly $3 billion in direct financial tax incentives, and many additional secondary incentives to Foxconn Technology Group. FoxConn is a Taiwanese multinational company and is the world’s largest contract electronics manufacturer and the fourth-largest information technology company by revenue.7
From nearly the moment it was announced that FoxConn selected Wisconsin as the location for the development of an advanced manufacturing facility to produce LCD screens, there has been much fanfare, debate, prognosticating, and commentary – everything from exceedingly optimistic forecasts of economic prosperity to dire predictions of economic collapse. Now that the FoxConn Bill has passed, it is possible to analyze the significant statutorily-required components of the FoxConn Megadeal incentive package.
Direct Financial Incentives
Payroll Tax Credits
The FoxConn Bill allows the Wisconsin Economic Development Corporation (WEDC) to designate one Electronics and Information Technology Manufacturing (EITM) Zone. There is no debate that the EITM Zone was created specifically for FoxConn, although the bill makes no mention of FoxConn.8 WEDC and FoxConn will be required to enter into an agreement that includes employment and capital expenditure goals, among other terms, before FoxConn may claim any tax credits.
WEDC may certify up to $1.5 billion in payroll tax credits to FoxConn. Annually for 15 years, FoxConn may claim a tax credit of 17 percent of the total payroll f all employees meeting the following criteria:
- the employee must work within the EITM Zone or outside the EITM Zone but within Wisconsin for the benefit of the zone;
- the employee must make at least $30,000 but not more than $100,000 annually; and
- the employee must be offered the same retirement, health and other benefits offered to other full-time employees.
The tax credit is applied against corporate income and franchise tax owed under Wis. Stat. section 71.23. If FoxConn’s income and franchise tax obligation is less than the payroll tax credit, the Department of Revenue must issue payment to FoxConn for the difference. This sort of tax credit is called a “refundable” tax credit.
Capital Expenditure Tax Credits
The FoxConn Bill allows WEDC to certify additional tax credits for “significant capital expenditures” in the EITM Zone by FoxConn. What constitutes a significant capital expenditure is not defined in the bill, and will be determined in rulemaking by WEDC. The tax credit may be no more than 15 percent of the capital expenditure up to a maximum of $1.35 billion. The tax credits may be issued over a period of seven years. The capital expenditure tax credit, like the payroll tax credit, is refundable.
According to the Legislative Fiscal Bureau (LFB): “Because of the [manufacturing and agriculture credit] and the state’s sales-based apportionment rules, it appears likely that most of the proposed tax benefit would be refunded to FoxConn and not used to offset its state tax liability.”9 In other words, it is expected that FoxConn will pay no income or franchise tax and will receive a check from Wisconsin for 15 years for nearly all of the payroll and capital expenditure tax credits.
The LFB estimates the annual appropriation needed to pay FoxConn for the payroll and capital expenditure tax credits will vary over the 15 year tax credit period, but could exceed $312 million in years 5 to 8 of the deal.10
To put that into perspective, the appropriation for the entire state highway rehabilitation program – the program that funds the resurfacing, reconditioning, and reconstructing existing highways across for the entire State – for Fiscal Year 2016-2017 was $289 million.11 Even taking into account increased tax revenues from workers and others, there will be a net loss ranging from $4 - $196 million for the first 15 years of the development, and the breakeven point for the investment will be in approximately 2042.12
Sales and Use Tax Exemption
The FoxConn Bill creates a sales and tax use exemption for building materials, supplies, equipment, and other services for property and services acquired or used solely for the construction of the FoxConn facility. The Department of Revenue projects that the sales and use tax savings for FoxConn will be $139 million.13
Regulatory Streamlining Incentives
The FoxConn Bill contains a number of regulatory streamlining provisions that are intended to expedite the construction of the FoxConn facility. What follows is a high-level summary of the major regulatory streamlining provisions in the bill.
- Judicial Appeals: Circuit court decisions relating to an EITM Zone that are appealed will follow an expedited review process. The compilation of the record on appeal and appellate briefing processes are expedited. Within three days of completion of briefing, the Court of Appeals is required to certify the appeal to the Supreme Court. The Supreme Court is directed to give preference to an appeal relating to an EITM Zone, but it is not obligated to take the appeal. A circuit court order concerning an EITM Zone is automatically stayed, and the Court of Appeals has the authority to vacate or modify the stay.
- Environmental Impact Statement (EIS): Permits and approvals for the FoxConn facility shall not be a “major action” under WEPA, which means that an EIS is not be required.
- Navigable Streams and Waterways: The bill adds “relating to the construction, access or operation” of the FoxConn facility to the current lists of Department of Natural Resources (DNR) permit exemptions for the following activities:
- placement of structures or deposit of material in streams;
- construction, maintenance or placement of bridges or culverts in navigable waters;
- construction, dredging, or enlargement of an artificial body connected to a navigable waterway; and
- grading or removal of 10,000/sq. ft. or more of topsoil from the bank of a navigable waterway.
- Change of Stream Course: The bill exempts from DNR permitting changing the course of any stream relating to the construction, access, or operation of the FoxConn facility.
- Water Diversion from the Great Lakes Basin: The bill exempts the diversion of water from the Great Lakes basin for the FoxConn facility from a DNR regulatory requirement that the diversion be consistent with any existing, approved water supply service area plan.
- Wetlands: The bill exempts from DNR permitting discharge or fill material in wetlands relating to the construction, access, or operation of the FoxConn facility. The exempted party, however, must compensate for adverse impacts to wetlands at a ratio of two acres to one by participating in an existing wetland mitigation program.
- Certificates for Electric Transmission Lines: The bill exempts from Public Service Commission certificating relocation of electrical transmission lines within the EITM Zone and public utility projects primarily to provide service to a new customer within the EITM Zone.
With respect to the environmental permitting changes, the bill cannot, and does not, affect federal environmental permitting. Additionally, many of the exemptions do not apply if the affected area is as an “area of special natural resource interest,” which is defined to include, state natural areas, trout streams, unique or special wetlands, and wetlands along Lake Michigan.
Finally, in many circumstances, the DNR has the authority to investigate and require a permit if the activity being conducted would result in environmental pollution or would have significant or material impact on the public or the rights of other owners.
The FoxConn Bill contains a number of additional incentives that would either directly or indirectly benefit the development of the FoxConn facility. Several of the most significant incentives are first, that the bill authorizes $252 million in contingent bonding for the construction of the I-94 North-South project, with the contingency being receipt of federal funding for the project. Second, as a new electric customer within the EITM Zone, FoxConn would be able to negotiate market-based pricing for purchases of power from Wisconsin public utilities, which may result in lower electric costs for FoxConn. Third, the bill requires the Department of Workforce Development to allocate $20 million in the 2017-19 biennium to worker training and employment necessary to support the FoxConn development. However, the bill provides no funding source for the allocation, and the DWD will need to reduce costs of other programs by $20 million to meet this obligation.
Additionally, the bill contains several provisions that are intended to reduce the financial strain on the local governments in the EITM Zone that will be involved with constructing ancillary facilities and public infrastructure. For example, the bill authorizes changes to tax incremental financing (TIF) regulations for TIF districts created within the EITM Zone, including removal of the 12-percent financing limit, extending the allowable life of the district to 30 years, and allowing the municipality to use TIF for public works or improvements within the EITM Zone. Additionally, the bill sets aside $15 million for municipal infrastructure and public safety projects and made a “moral obligation pledge” to provide additional financial assistance in the future. The bill also authorizes certain county sales tax revenue bonds.
Restrictions Placed on FoxConn
The FoxConn Bill contains three primary restrictions.
First, as summarized above, the payroll tax credit may only be claimed for employees making $30,000-$100,000 that work in the EITM Zone or outside the Zone, but in Wisconsin for the benefit of the EITM Zone, and that are offered the same benefits packages offered other full-time employees. The FoxConn Bill requires that WEDC “to the extent possible, attempt to include terms in any agreement negotiated between … [FoxConn and WEDC] … that encourage [FoxConn’s] hiring of Wisconsin residents.”14 These restrictions are intended to ensure that only Wisconsin-based jobs with reasonable pay and benefits qualify for the tax credit. If Wisconsin-based jobs are not created, FoxConn will not be entitled to claim the full $1.5 billion in payroll tax credits.
Second, the capital expenditure tax credit may not be any more than 15 percent of FoxConn’s capital investment. As a result, FoxConn will not get the full $1.35 billion in capital expenditure tax credits unless it spends nearly the full proposed $10 billion on the new facility. The bill also requires WEDC to “establish job creation thresholds for … [FoxConn] … for each year in the zone. The claiming of capital expenditure tax … shall be tied to those job creation thresholds.”15 This provision is intended to further ensure that FoxConn creates Wisconsin-based jobs in order to receive tax credits.
Finally, WEDC has the authority to revoke the FoxConn’s certification to receive tax credits if it supplies false or misleading information to get tax credits, leaves the EITM Zone to conduct substantially the same business elsewhere, or ceases operations in the EITM Zone and does not renew operations within the EITM Zone within 12 months. If FoxConn fails to maintain targeted employment or capital expenditures levels, which will be set forth in the agreement between FoxConn and WEDC, WEDC has the authority to require FoxConn to repay the tax credits for that year. WEDC may also require FoxConn to repay tax credits if, within five years of receiving the tax credits, FoxConn ceases to operate the facility and commences substantially similar operations in another state.
The Legal Landscape Forever Changed
Irrespective of whether FoxConn builds a $10 billion manufacturing facility and creates the projected 13,000 jobs, or the development never materializes and/or fails to bring about the economic prosperity some believe will come, the legal landscape for economic development incentives has been forever changed. Wisconsin is now one of only a handful of states that has passed special legislation authorizing multiple billions of dollars in incentives for a Megadeal.
8 The FoxConn Bill contains provisions related to other development zones created by WEDC. However, this article only analyzes the EITM Zone promulgated for FoxConn.
11 Wis. Stat. §§ 20.005 and 20.395(3)(cq).
12 LFB FoxConn Memo, p. 16.
14 2017 Wis. Act 58, Section 49 (Wis. Stat. § 238.396(4)(g)).
15 2017 Wis. Act 58, Section 49 (Wis. Stat. § 238.396(3m)).