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.)

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).

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	5.1%	4.2%	3.9%		4.3%	2.3%
1990-91 to 2000-01	2.6%	3.3%	3.2%		2.2%	2.3%
2000-01 to 2010-11	3.0%	5.6%	2.7%		2.8%	4.2%

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.

View Notes and Sources

Let's now compare overall inflation with health care inflation (inflation tables are at: http://data.bls.gov/cgi-bin/surveymost?cu). 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?

Why is economic development a “middle-class” issue?

Some of you may have found it odd that a blog devoted to the situation of the middle-class has had so many articles on economic development. “How does that affect the middle class?” you may ask. That's a fair question, and today I'll take a whack at it.

My academic work has had a fairly straightforward development from considering business-government bargaining (and the profound impact rising business mobility has had on that) to considering the economic development subsidies that play such a big role in that bargaining – and in ways of controlling those subsidies. See in particular my books Competing for Capital and Investment Incentives and the Global Competition for Capital. What those books show is that the unregulated competition, job-poaching approach of the U.S., is not the only possible one. The European Union has imposed rules specifically limiting the subsidies given to large mobile companies. And, overall, the EU regulatory rules (sharply limiting subsidies in rich areas, allowing higher subsidies in poorer regions such as the East European new member states) work in holding down the size of the incentives given to companies. Hyundai got $115,000 per job from Alabama, but only about $75,000 per job from the Czech Republic, even though Alabama is much more prosperous than the Czech Republic and shouldn't have to give away as much, all other things equal. The EU's “regional aid guidelines,” as they are called, really have teeth.

Without further ado, then, let me address why the middle class should care about economic development subsidies.

1. Economic development subsidies represent a transfer from the average middle-class taxpayer to business owners, who on the whole are much wealthier. In other words, investment incentives exacerbate income inequality within the country. Companies using their mobility to extract subsidies are often busy reducing their wage bill or regulations as well through the site location process.

2. Governments justify all sorts of middle-class unfriendly policies through the need to compete for investment. Whether it's proposing “right-to-work” laws in Missouri and New Hampshire, cutting business taxes in (your Republican state here), slashing government jobs, or gutting regulations to coddle the “job creators” who are actually sitting on trillions of dollars of cash already, competition for investment is the means by which races to the bottom (in taxes, wages, environmental and social protection) are usually thought to occur. By the way, I like Dale Murphy's Oxford University Press book The Structure of Regulatory Competition as an antidote to those who think that races to the bottom are some kind of urban myth.
   
   
3. Tying these two factors together, investment subsidies drain money from other government spending programs, increase debt, or require a higher tax burden on someone else, or some combination of the three.

For me, then, my commitment to reducing inequality is what fueled my interest in economic development subsidies. As my dissertation adviser Charles Lipson always says, people become interested in political science because they care about politics, and I'm certainly no exception. Economic development is obviously not the only issue that affect the middle class, but I hope I've convinced you that it is actually quite significant. I'd be pleased to hear your thoughts.

Defending Against Relocation Threats with Retention Subsidies -- Paid with Employee Taxes

When companies threaten to relocate, often desperate states and cities will give almost anything to keep them. As I mentioned in a previous column, New York City and Kansas City have been among the larger victims of this dynamic. In his most recent column, David Cay Johnston (now at Reuters) lays out a depressing, newish, way that states are cannibalizing their tax revenues to retain existing businesses: letting companies keep withheld taxes of their employees.

Painful as it feels to have a lot of hard-earned income taken from your paycheck for taxes, a new Illinois law does something Americans may find surprising. It lets some employers pocket taxes for 10 years.

You read that right -- in Illinois the state income taxes withheld from your paycheck may be kept by your employer under a law that took effect in May.

As Johnston shows, these deals were almost entirely for retention of existing facilities. Motorola, Chrysler, Ford, and Mitsubishi were not required to create any new jobs, while Continental Tire has to create 400 new jobs. Navistar, however, is getting this subsidy despite the fact that it will lay off 900 of its 3100 current workers. (Note that Illinois did some one-off deals using this tactic before the new law went into effect.)

I mentioned that keeping one's employees' taxes is not entirely new. For example, in Missouri, cities with an earnings tax (St. Louis and Kansas City) can use those anticipated revenues in tax increment financing subsidies. In 2004, Kansas City did just that, giving H&R Block a brand new headquarters building worth $308.4 million, paying $292.3 million of the cost through its TIF (KC Star, March 4, 2004), a more than 94% subsidy! This project was a relocation within Kansas City, under threat of relocation to Kansas.

The threat of relocation of such large projects is a huge one and can generate gigantic windfalls for the companies exploiting their mobility. Ultimately, we need national rules against job piracy so retention subsidies become unnecessary.

Subsidy Transparency Only Works if Citizens Make Governments Comply

Minnesota is the home to the first statewide law mandating subsidy transparency, way back in 1995 (http://www.goodjobsfirst.org/states/minnesota). Among other things, the law provided that state and local subsidy programs had to create job creation and wage level requirements, though it did not specify what they had to be.

The law made it possible to analyze some aspects of Minnesota economic development, including wage performance, subsidies and sprawl, and subsidized relocations within the state (http://www.goodjobsfirst.org/states/minnesota).

However, a new study by the St. Cloud Times (July 17) shows a troubling unevenness in cities' compliance with the law's reporting requirements, a full 15 years after it was first adopted. While some programs, like the state's Jobs Opportunity Building Zone (JOBZ) program, generally make it easy to see whether job creation and wage commitments have been met, some cities do a bad job reporting on whether local subsidy programs do the same.

For example, the article says the city of St. Cloud (northwest of the Twin Cities) has at least seven tax increment financing (TIF) projects since 1995 that did not establish job and wage standards as required by the 1995 law. By contrast, nearby St. Joseph  and Waite Park did attach such standards to their TIFs. Sauk Rapids, population 12,773 (2010 census), has adopted 22 subsidies (mostly TIF) since 1995, yet did not respond to the newspaper's request for job and wage information with data it should have at its fingertips.

This variation at the local level is important because in Minnesota because, according to Good Jobs First, local subsidies far exceed state subsidies, with $333 million in TIF provided in 2009.

The point, then, is that while transparency is the #1 precondition for subsidy reform, citizens have to keep on their toes to make sure transparency required by law actually exists in practice.

US health care bang-for-buck declining over time and relative to other rich countries

Lane Kenworthy has a great post (http://lanekenworthy.net/2011/07/10/americas-inefficient-health-care-system-another-look/, h/t Matthew Yglesias) comparing health care spending and life expectancy. He goes beyond a simple scattergram of rich countries on the two variables to look at what has happened over time in 20 OECD member states. It plots how each country's health care spending per capita and life expectancy have increased over time.

Notice how divergent the U.S. curve is. Not only does it have lower life expectancy than the other 19 countries graphed, it is gaining less in life expectancy for each dollar per capita of increased health care spending. As Kenworthy notes, this is especially true "after the early 1980s when we reached expenditures of about $2,500 per person (in 2005 dollars) and life expectancy of around 74-75 years." Since then, spending in the U.S. has more than doubled to over $6,000 (constant 2005 dollars), but we have only gained four years or so in life expectancy. Japan only spends about $2,500 per capita today, yet has achieved a life expectancy of about 83 years.

 Kenworthy points out that using changes rather than levels of life expectancy and spending lets us factor out some of the differences between countries, citing higher U.S. murder rates, obesity rates, and geographic dispersion. I'm not sure these are such big drivers of differences in life expectancy; one major factor is the difference in infant mortality rates. According to the CIA World Factbook's 2011 estimates (https://www.cia.gov/library/publications/the-world-factbook/rankorder/2091rank.html), the U.S. has an infant mortality rate of 6.06 per 1,000 live births; the other 19 countries are all below the U.S., with Sweden and Japan having rates of less than half that. Moreover, geographic dispersion does not seem to make much difference within the United States: Of the top 20 states for life expectancy (http://en.wikipedia.org/wiki/List_of_U.S._states_by_life_expectancy), nine of them are also among the 20 least densely populated states (http://en.wikipedia.org/wiki/List_of_U.S._states_by_population_density), suggesting that if there is a correlation, it is likely to be small.

That said, Kenworthy's chart gives us a striking illustration of the inefficiency of the U.S. health system and how its relative efficiency has declined over time.