Is $1.2 Billion in state incentives for "Chip factory" the best use of taxpayers' money?

By Kent Gardner

After having already received hundreds of millions of dollars of taxpayer support for the Albany nanotech initiative, the Capital District once again is in the news for an astounding economic development coup: Advanced Micro Devices Inc. and Gov. George Pataki recently announced the siting of a new “chip fab”—a factory to make semiconductors—in Saratoga County.

AMD recognized that New York is the place to be for high-tech manufacturing, that we have the finest infrastructure, the smartest engineers, the most business-friendly government and the most productive workers in the world. Oh, and the $1.2 billion in incentives didn’t hurt.

No typo—that’s B-B-B-BILLION, with a B. What’s this mean for the state’s economy? Let’s do a quick assessment.

First, the jobs and payroll from the operating chip fab: The company has estimated the plant will employ 1,000 workers. Based on averages reported by Minnesota IMPLAN Group Inc., a well-respected purveyor of economic data, this level of employment in the semiconductor industry will generate labor income of perhaps $95 million a year. And these jobs will stimulate more jobs as AMD buys goods and services in the state and its employees do the same. Doing a rough calculation, this probably will total another 800 to 900 jobs earning an additional $35 million (the “spillover” jobs are largely from consumer spending and don’t pay as well as the AMD jobs).

OK, I know that “economists estimate that there will be a 3:1 ratio for the stimulation of additional jobs in the region.” The quote is from Theodore Geisel, chairman of Albany’s Center for Economic Growth, printed in the July 24 issue of the Capital District Business Review. Pardon my cynicism, but which economists? Using what data? Again, my number is straight from Betty Crocker and is seriously underbaked, but 3:1?

Second, earnings from the construction phase: Building a chip fab isn’t like throwing up a Wal-Mart or a Walgreens. These are expensive and complex facilities. We’re told to expect a project costing in the neighborhood of $3.2 billion. But much of this cost is for highly specialized equipment. I suspect (although I’d love to be proven wrong) that much of this expenditure will be sourced outside the state. So let’s assume that half the cost is spent in the state and (for the purpose of analysis) is in the form of industrial construction. If so, then total wages for the construction period (including direct and spillover earnings, both wages and proprietor’s earnings) might total $1.4 billion.

Big money, to be sure. Geisel goes on to cite a fabulous economic impact from a new chip fab in Germany’s Saxony region: $5.5 billion in five years. Again, pardon my cynicism. I do this kind of thing for a living and I can vouch for how difficult it is to get a precise figure, even after the fact. But if we add up all the benefits to New York’s winners, the payback from the AMD chip fab is truly rapid.

Here’s the rub: Much of the funding to entice this new venture comes from taxpayers scattered all around New York. But the taxpayer doesn’t get the benefits. They go to the lucky 1,000 who get jobs at the new plant or one of the 800 to 900 new jobs added to the work force of the Capital District’s restaurants, retailers and chip fab suppliers. So we tax 18 million people to benefit 2,000?

There is a benefit for taxpayers, of course. While I’m sure AMD won’t be paying taxes for many years, their employees will pay taxes. Figuring roughly, I’m guessing that we can expect maybe $5 million a year in personal income tax, post-construction. Sales tax might come in at another $4 million annually, split between the state and localities. And there are other taxes, of course (this is New York, after all).

So if we think of the taxpayer as the “owner” of the business (the State of New York), we’re spending $1.2 billion in the early years and getting a 25-year stream of tax revenue worth a lump sum of about $215 million today. To be fair, the total value of the incentive package is hard to estimate and isn’t all cash: The press release lists $500 million in grants for plant and equipment, plus $150 million in an R&D grant, plus $300 million in funds for infrastructure improvements around the site. The rest appears to be future foregone tax revenue. But that’s still nearly $1 billion in real money.

There are other benefits, I’ll grant. Will the chip fab catalyze a fabulous expansion of Tech Valley, well beyond what a normal economic impact analysis would predict? Perhaps. Incentives may be a necessary evil—but have we given away the store with this one?

But the more important question is this: How else might we have spent this money? The entire budget for programs administered by Empire State Development and the New York Office of Science, Technology and Academic Research was $130 million in 2005-06. What share of that goes for small-business development? For small loans to struggling new businesses scattered about the state? For retraining for displaced workers? What could a cool billion buy in expanding these other programs?

In short, is this the best use of state funds or just the best photo op in recent history?

Gardner is president and chief economist of the Center for Governmental Research Inc. This column was published in the September 8 edition of the Rochester Business Journal.