Governor Scott Walker speaking at the 2017 Conservative Political Action Conference (CPAC) in National Harbor, Maryland. Photo credit: Gage Skidmore
In 2011, at the tail end of deliberations on the first budget of Scott Walker’s administration, lawmakers added something new: a credit that would minimize income taxes in two of the state’s biggest industries. The Manufacturing and Agriculture Credit (MAC) was passed without receiving a public hearing and phased in over the next several years, reaching its top rate of 7.5% in 2016. Now fully in effect, it all but eliminates tax liability on qualifying income for individuals and corporations in those sectors. The MAC is expected to cost the state more than $1.4 billion by the middle of 2019.
In theory, this credit stimulates economic growth by encouraging businesses to build in Wisconsin. In practice, it depends who you ask. Supporters like the business lobby Wisconsin Manufacturers & Commerce (WMC) have long touted the credit as a powerful investment, citing the 34,000 manufacturing jobs added since 2011 as evidence of its success. By contrast, a 2016 report from the Wisconsin Budget Project frames it mainly as a tax giveaway for millionaires with a negligible impact on employment.
As the Wisconsin Budget Project’s report explains, businesses do not need to create jobs to claim this credit. They can, in fact, outsource jobs or close facilities and still receive it. Individual claimants might invest the money back into their companies, but they don’t have to. This lack of accountability, combined with the high cost, has led some to wonder whether the MAC is easing the state’s economic woes or adding to them.
“As we’re debating the state budget, it’s important to look at why we don’t have enough revenue to do a lot of the things that the governor wants to be committed to,” says Rep. Gordon Hintz (D-Oshkosh). “One of the big reasons we don’t is because of decisions like this tax credit.”
The Question of Jobs
In April 2017, UW-Madison professor Noah Williams released a report called “The Impact of the Manufacturing and Agriculture Credit in Wisconsin.” The study compared the rate of job growth in Wisconsin border counties with that of neighboring counties in other states. Williams, a former adviser for Walker and Marco Rubio, found that manufacturing employment had, on average, grown faster in Wisconsin than in the other counties. Applying these results statewide, he concluded that more than 20,000 manufacturing jobs had been created because of the credit.
The MAC’s most vocal critics were unconvinced. Rep. Chris Taylor (D-Madison) put out a press release describing the study as “severely flawed.” Hintz says the report mistakenly attributes all job growth to the credit, stating that more manufacturing jobs were gained in the two years before it was implemented than in the four years after.
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Nevertheless, Williams’ study adds substance to a narrative that MAC supporters have promoted for years: The tax credit gives Wisconsin a competitive edge by making it a more attractive place for businesses to be. Reduce the tax burden and established manufacturers expand. Out-of-state companies relocate. Start-ups start up. Once all that happens, they argue, the jobs will come.
There are examples of this happening. In a report on the MAC from Wisconsin Public Television, Belmark president Karl Schmidt describes how the credit motivated the packing company to expand facilities in De Pere. “That’s about 240 jobs that we added here that would not have been here. That would have been in another state,” Schmidt declares in the segment.
Is Belmark one of a few isolated cases or part of a large-scale change? It’s hard to answer that, because it’s hard to know how big of an incentive taxes really are. Andrew Reschovsky, professor at UW-Madison’s La Follette School of Public Affairs, says research indicates that taxes are among the many factors that businesses consider when deciding where to expand, but not necessarily one of the main ones.
“Generally the conclusion is that taxes are on the list, but nowhere near the top,” says Reschovsky. He lists access to things like raw materials, a customer base and a skilled labor force as a few of the bigger motivators.
More opportunities have emerged over the last few years as the country climbs out of recession. Still, Wisconsin’s rate of job creation has lagged behind the national average. Recent data from the Bureau of Labor Statistics (BLS) reveals that in 2016, the rate of private sector employment growth slowed to 0.5%, and that nearly 3,800 manufacturing jobs were lost.
In an email, Williams writes that this most recent release does not affect the conclusions of his study, which included data through the third quarter of 2016.
“The MAC helped to increase growth in manufacturing employment over what it would have been in the absence of the credit,” he writes. “Wisconsin would have lost more manufacturing jobs in 2016 if the credit were not in place.”
Unequal Distribution
While the MAC’s effect on job growth remains debatable, one thing is clear: The credit has cost a lot more than intended. According to the Wisconsin Budget Project, the credit was initially projected to cost $129 million in reduced income tax collections in 2017 after it was fully phased in. The Legislative Fiscal Bureau now estimates that it will cost more than twice that much this fiscal year and $320 million in 2018.
Some degree of miscalculation was to be expected: Estimates are based on a business’ future profits, making their eventual cost hard to predict. Still, for those who oppose the MAC, the inflated price tag makes a damaging decision even worse.
“If we had a spending program that cost two-and-a-half times the amount it was budgeted for, there would be outrage,” Hintz says. “There’d probably be public hearings. Somebody would be in trouble.”
The frustration is not just about the amount of money, but where the money goes. A 2016 memo from the Legislative Fiscal Bureau showed 88% of the credit going to people who make more than $500,000 a year. It also estimated that 11 individuals with annual incomes of more than $30 million would each receive nearly $2 million in 2017.
“This is the most tilted credit I have ever seen in Wisconsin,” says Wisconsin Budget Project research analyst Tamarine Cornelius.
In March 2017, Taylor and several other Democrats proposed an alternative: legislation that would cut taxes for middle class families instead. Under this plan, a family of four with an income of $45,000 would get a roughly $600 credit. They proposed paying for it in part by repealing the MAC, which Rep. Chris Taylor calls “a total scam on the working people of this state.”
The middle class pays the highest percentage of their income in state and local taxes, according to the Institute on Taxation and Economic Policy, and although unemployment in Wisconsin has returned to pre-recession lows (an estimated 3.2% in April), wages have stagnated, making it harder for working families to get by. “These massive tax giveaways are not trickling down,” Taylor says. “When you don’t have a vibrant middle class, you’re not going to have a vibrant economy; end of story.”
The 2017-’19 budget includes one proposed change, closing a loophole that allowed some to essentially claim the MAC and credits paid to other states on the same income. Cornelius describes this change as a “minor tweak” that does not signal a fundamental shift in lawmakers’ thinking.
Investing in Communities
At the same time that the MAC has phased in, many public services have been slashed. Spending on transportation, K-12 schools and the UW system has been drastically reduced. Reschovsky connects these decisions to “the mythology that taxes are the only thing that matters.” Part of the trouble with this mindset is that these same services are important for attracting businesses and driving economic growth. “The rationale that’s often used is that these tax credits will attract people to our communities and help us grow economically,” says Heather Bourenane, director of the Wisconsin Public Education Network. “But when you ask someone why they’re moving to a community, the first thing they say is the schools,”
Walker’s 2011-’13 budget cut public school funding by nearly $800 million. Since then, districts have increasingly relied on referendums, voting to raise taxes to make up for the loss of state support. Bourenane describes schools going to referendum for “the most heartbreaking of basic maintenance,” and says that increasing funding is “an economic question as much as a moral one,” given the importance of schools to communities.
Cornelius regards investments in these services as a way to support not just one or two industries, but business in general. “Businesses need a lot of things to thrive. They need a solid transportation network, healthy, well-educated workers, communities that people want to live in,” she says. “So, to have this narrow focus on tax cuts as the only way to help Wisconsin businesses is short-sighted.”
Hintz cites long-term investment in priorities like education as the most important thing that state governments can do to stimulate economic growth. Tax policy can also play a role, he says, provided it meets certain standards.
“Fairness, accountability, effectiveness,” he says. “Any tax policy should have to pass that test.”
