Runaway Tax Cut: Price Tag for Tax Credit far Higher than Expected
A tax cut that nearly wipes out income taxes for manufacturers is now expected to cost the state more than twice the original estimate, and has reduced resources for Wisconsin’s public schools and university system.
The Manufacturing and Agriculture Tax Credit gradually reduces income tax rates for businesses engaged in manufacturing or agriculture. When the credit is fully phased in in fiscal year 2017, many businesses engaged in those activities will not have to pay any state incomes taxes at all, and others will have their income taxes reduced by at least 95%.
The projected cost of virtually eliminating income taxes for manufacturers and agricultural producers has ballooned since lawmakers passed the measure in 2011. This year, the tax cut is slated to reduce taxes for businesses by $152 million, more than twice as much as was originally estimated. Once the tax cut is completely phased in, the credit will cut taxes for business by a whopping $285 million per year, a price tag $156 million higher than originally expected.
To build a strong economy, Wisconsin needs to invest in high-quality schools, safe communities, and affordable higher education. But the growing cost of this tax cut jeopardizes our ability to strengthen the assets that make Wisconsin a good place to raise a family and to do business. Wisconsin doesn’t get much in return for this type of corporate tax cut, and we lose the revenue we need to support Wisconsin’s schools, University System, and access to health care. That’s a bad deal for Wisconsin.
In addition to the rapidly climbing cost, there are two other big downsides to this tax cut:
- A troubling lack of accountability: In contrast to other tax credits that are tied to job creation, this one isn’t tied to anything. Corporations can get the tax cut even if they are laying off workers or sending jobs overseas.
- A preference for manufacturing over other types of businesses: Manufacturing and agricultural production make important contributions to the Wisconsin economy, but singling out a particular industry for a tax cut makes it harder for other sectors of the state economy to succeed. And it’s shortsighted to focus so much of our public resources on manufacturing at a time when the manufacturing sector in the U.S. is shrinking as a share of the total economy.
Given the poor design of the tax cut and its burgeoning costs, the best thing for lawmakers to do would be to eliminate the tax credit entirely. However, the Legislature’s focus on cutting taxes makes outright repeal unlikely. It would be more politically palatable for lawmakers to compromise by simply halting the phase-in of the credit at the 2014 level. That move would increase state revenues by $226 million over the upcoming two-year budget period, and still give manufacturers a hefty tax cut.
If lawmakers pursued this compromise path, Wisconsin could put the brakes on this runaway tax cut, and we would be better able to make much-needed investments in educating Wisconsin school children, protecting the environment, and improving the health of workers.