Wisconsin manufacturing tax credit expensive, ineffective and unaccountable

Posted on Mar 15, 2017 :: Insight From
Gordon Hintz
Posted by , Insight on Manufacturing Staff Writer

The question on state budget decisions is, what is the best use of limited resources if the goal is to expand economic opportunity?

In 2011, the governor’s so-called “manufacturing and agriculture tax credit” was included in the budget during a last-minute motion before the Joint Finance Committee. At that time, the credit was forecast to cost $128 million each year when fully phased in by 2016-17. However, state estimates show that the credit’s cost has more than doubled and is expected to balloon to $334 million a year by 2018-19. By then, the credit will have cost $800 million more than was expected when it was passed.

In order to pay for the dramatic increased cost of this tax giveaway, cuts were made to public schools and the UW and Wisconsin Technical College systems. In response to state public education cuts, 139 school districts have voted to raise their own property taxes by $630 million to fund education. In addition, the lost revenue from this credit resulted in the governor borrowing $209 million the last two years from future taxpayers — just to keep the budget in the black. In other words, there have been significant consequences and costs associated with this credit.

It would be one thing if the hundreds of millions spent on this credit would have resulted in successful job creation. However, this expansive credit has been ineffective at creating new jobs and is unaccountable to taxpayers. Supporters of this tax giveaway highlight the growth of 35,000 new manufacturing jobs in the state since 2011, a time when the state was coming out of the biggest recession since the Great Depression. Yet, the vast majority of those jobs (nearly 27,000 of the 35,000 total) were created in 2011 and 2012, before this credit was even in effect. So, there has been no correlation between the credit and the creation of new jobs. In addition, Wisconsin’s economy ranks eighth in job creation out of 10 Midwestern states over the last five years, with Wisconsin private sector job growth increasing at slightly more than half the national job growth rate.

Eliminating a business’s tax liability certainly reduces costs. The problem is that eliminating taxes alone does not ensure that a business will create jobs with those savings. You don’t need to be an economist to understand that unless there is more demand for your product, you will not hire someone just because of a tax credit. And because the credit has zero job creation requirements, a company can receive the credit and export jobs to other states or foreign countries. Or, a business can lay off employees and invest the savings into automation, a trend that is expected to continue in the future.

I have long supported accountable tax credit programs that reward companies that add jobs or invest in worker training. In 2009, I supported the Enterprise Zone Program, successfully used to expand the workforce at Mercury Marine and Oshkosh Corp. This program provided tax credits of up to 7 percent of their eligible payroll for new hires, decreasing the cost of labor and increasing employment in Wisconsin. I have authored similar legislation for small businesses.

The last problem with the credit is the distribution of who benefits. More than 75 percent of the credit (claimed as income tax) goes to those making more than $1 million per year. It is projected that $22 million of the credit will go to a mere 11 individuals who all make $30 million or more per year. And some business owners will owe less in state income tax on that production income than a full-time worker earning minimum wage. It is hard to defend something this expensive, ineffective and that disproportionately benefits the wealthiest individuals in our state. That is especially true when it comes at the expense of Wisconsin’s education system, by far the most important investment for expanding economic opportunity to everyone.