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Friday, July 29, 2011

Wisconsin Subsidies Could Hire 12,000+ State Workers

As we reach the home stretch of the August 9 Wisconsin Senatorial recall elections, it's good to keep in mind just how much businesses there receive in subsidies from the state. To my knowledge, no one has ever made an estimate of total business support there, and so Wisconsin was not used in constructing my national estimate of $70 billion per year in subsidies by state and local governments nationwide.
In light of the upcoming election, I made a special calculation of subsidies in Wisconsin based primarily on the 2011 Summary of Tax Exemption Devices plus the five programs tracked by Good Jobs First in its report “Show Us the Subsidies”  This will give us some insight into the potential impact of business subsidies on state employment. As we will see, I estimate the giveaways could be redirected to create over 12,000 middle-class public jobs.

The tax exemption report gave helpful descriptions of the provisions, but certainly I would be able to do a more thorough job in identifying programs with the help of in-state budget experts. So, here I present a conservative estimate of the subsidies to business in Wisconsin.

What I count: I try to make my estimates internationally comparable, so my goal is to identify programs and tax provisions that would be considered a subsidy elsewhere in the world. In particular, I look for provisions that are specific to an industry, a region, a type of business (i.e., small and medium enterprise), or specific goals like R&D, job creation, or pollution control. European Union state aid rules are my model here.

I include, then, most of the state's corporate income and franchise tax exemptions (omitting a few smaller ones to save time), with the important exception of Net Operating Loss provisions, which apply to every corporation and hence are not specific. Wisconsin has a recycling surcharge, which has subsidies for small firms (exempt below $4 million in gross receipts) and for large ones (a cap of $9800 regardless of corporate income).

Sales tax exemptions are the most difficult to judge. When I first made a national subsidy estimate in my 2000 book, Competing for Capital, I counted a large number of these tax breaks as subsidies. I am now persuaded that many sales tax provisions are simply designed to prevent what's known as tax cascading: if businesses had to pay sales tax on all their raw materials and intermediate goods and services, the final consumer would be paying some multiple of the statutory sales tax when purchasing a final good. So now I only count sales tax breaks on machinery and equipment, which are designed to attract investment (pretty much every state does this, and it comes to a lot of money); and industry-specific sales tax exemptions. Thus, if legal services to businesses were exempt from sales tax, I would not consider that to be a subsidy; but, if legal services were only exempt for the banking industry, that would be a subsidy to banking and I would count it. Again, specificity is a key consideration.

Wisconsin presents one other conundrum with sales tax: personal property and supplies used in farming are exempt from the tax. Normally, I'd say that just prevents tax cascading, but if I read the 2009 Summary of Tax Exemption Devices (p. 58) correctly, this provision only dates back to 2007, which may argue for considering it industry-specific – or may argue that a similar provision for manufacturing is no longer a subsidy. I present the estimate both with and without this provision below.

Finally, Good Jobs First tracks five discretionary economic development subsidies, and I include that $37.8 million as well.

Subsidies in Wisconsin

Corporate income tax subsidies                  $128.1 million
Recycling surcharge tax subsidies              $ 38.4 million
Discretionary econ development                  $ 37.8 million
Sales tax exemptions excluding
personal property used in farming                $398.6 million

Total with personal property/farming            $602.9 million

Personal property/farming                           $187.6 million

Total with personal property to farmers        $790.5 million

Even excluding the iffy final category in the table, we're looking at over $600 million in subsidies to business per year, enough to hire 12,000 state employees making $50,000 annually in salary and benefits. While it is certainly possible that some of the support to business should be maintained, the large number of public jobs it is costing Wisconsin strongly argues for explicitly weighing which is the better use of the state's money.

Instead, as we know, the Walker administration pushed even more tax breaks through the legislature earlier this year, further exacerbating the state fiscal crisis. This highlights the importance of the August 9 recall elections, as well as the probable recall of Walker himself next year.

(I'd be interested in your feedback on the procedure I used to make this estimate, as well as the political issues involved. If you would like a copy of the full calculation, please contact me.)


  1. I don't disagree with your major, and interesting, conclusion. But I but question your comment about "cascading" taxes. Say a company pays $1 for each of two raw materials, paying 6% sales tax on each, for a total of $0.12 sales tax. Add a dollar for labor and say and a customer buys the product for $3 plus 6% sales tax, which would be $0.18 tax. The customer is not paying a multiple of the statutory rate, only 6% of the final sales price.

  2. In your example, I think that if the company paid $2.12 for its raw materials, and then $1 for labor, it would charge $3.12 plus tax (excluding profit, obviously) for the product, not $3.00. Otherwise, it is losing money.

    The consumer would then pay 19 cents (6% of $3.12, rounded) more in tax, for a final price of $3.31. Of the 31 cents of sales tax embodied in the final price, the raw materials would have had sales tax paid on them twice. The value added by the company, which is $1, would only be taxed once.

    I hope this is a little clearer.