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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.)

Wednesday, July 27, 2011

Krugman shows us Heritage mendacity on health care

Paul Krugman points us to a link on the legislative and policy history of health reform. The points we need to take away are two: the main ideas behind the Affordable Care Act (individual mandate, community rating, subsidies so everyone could afford insurance) are present in a  1989 Heritage Foundation report by Stuart Butler; and Heritage now pretends that this report has no resemblance to the Affordable Care Act. Why am I not surprised?

At least Heritage has not scrubbed the report off its website (as of 10:30 AM July 27).

Tuesday, July 26, 2011

Heritage Tries to Mislead Us on How Swell Poverty Is

A little late getting to this (I've had unexpected travel), but Matt Yglesias makes an important point I wanted to expand upon. That is, just because you can afford a number of modern conveniences doesn't mean you're not poor. Similarly, people don't go bankrupt because they can't afford a TV, but because of medical bills (62% in 2007) or job loss.

Yglesias: The Heritage Foundation is out with the latest version of its annual poor people aren't poor because electronics are cheap report.....A serious person would follow this up with a discussion of relative prices. Over the past 50 years, televisions have gotten a lot cheaper and college has gotten a lot more expensive. Consequently, even a low income person can reliably obtain a level of television-based entertainment that would blow the mind of a millionaire from 1961. At the same time, if you’re looking to live in a safe neighborhood with good public schools in a metropolitan area with decent job opportunities you’re going to find that this is quite expensive. Health care has become incredibly expensive.

How much more expensive? For higher education costs, the College Board presents this table of how far above the general inflation rate college costs have grown. Remember, these are tacked on top of the general inflation rate. Thus, over the 30-year period public four-year universities have gotten 3 1/2 times as expensive in real (inflation-adjusted) terms, for example.

Tuition and Fees

Tuition and Fees and Room and Board

Private Nonprofit Four-Year
Public Four-Year
Public Two-Year

Private Nonprofit Four-Year
Public Four-Year
1980-81 to 1990-91

1990-91 to 2000-01

2000-01 to 2010-11


Average annual rate of growth of published prices in inflation-adjusted dollars over a 10-year period. For example, from 2000-01 to 2010-11, average published tuition and fees at private four-year colleges rose by an average of 3.0% per year beyond increases in the Consumer Price Index.

Let's now compare overall inflation with health care inflation (inflation tables are at: The CPI-U (consumer price index – urban) for all items was 225.722 in June 2011, compared to 37.8 in January 1970 (1982-84=100), meaning that urban prices were 5.97 times as high as 41 years earlier. By contrast, the CPI-U for medical care rose to more than 12 times as high over the same period, from 32.7 to 399.552. No wonder health care costs have caused problems for so many people.

To sum up, the economic problems facing poor or middle-class people aren't related to spending on frivolities, which are largely low-cost. Instead, they come from what one's health insurance company will or won't pay for, whether you have a job or not, and whether you can afford the housing and education to give your children a better life. The Heritage folks, while giddily pointing out that the poor in America see doctors, also support deep cuts (“entitlement reform”) to the programs that make that possible in the first place. Have they no shame?