Wisconsin a Tax Heaven for Businesses
The evidence suggests taxes are low on businesses, and have been for many years.
For many years the Wisconsin Manufacturers and Commerce has complained that this state was a “tax hell” that over-taxed businesses. The WMC and conservative talk radio constantly slammed Democratic Gov. Jim Doyle as bad for business. Scott Walker took up that line when he ran for governor in 2010, even promising the Metropolitan Milwaukee Association of Commerce that he would completely eliminate the corporate income tax.
As it turned out, Walker offered more modest measures. His first budget gave Wisconsin companies a tax break for every new job they added; The deductions were worth between $92 and $316 per job depending on the size of the company, according to the Legislative Fiscal Bureau, and were expected to cost $67 million over two-years.
His current budget proposes to widen tax loopholes for businesses, and, more controversial, award indefinite amnesty to tax cheaters. Walker would allow businesses to avoid paying taxes in past years if the state previously knew of the underpayment but took no action.
“That’s extraordinary,” said State Rep. Cory Mason, D-Racine, a member of the Legislature Joints budget committee, in an article by the Wisconsin State Journal. “We talk about being tough on people who break the law, but this allows people to cheat.”
The implication is that Wisconsin is such a hell for businesses we must bend over backwards to make amends, even if it means letting businesses cheat on taxes. In fact, Wisconsin’s tax structure is better for businesses than in most states.
Perhaps the most in-depth reports on state taxes on business are done for the Council on State Taxation (COST), a “nonprofit trade association consisting of nearly 600 multistate corporations engaged in interstate and international business.” The group hires the internationally-known company Ernst & Young to analyze state taxes on business.
In one study, the company looked at each state’s effective tax rate on new investments on business and found that Wisconsin ranked fourth lowest. The study used “the type of analysis that businesses use to evaluate decisions about where to locate new capital investments in plant and equipment” in order to “isolate the impact of state and local business tax systems on new capital investment, the cornerstone of state economic development.” Wisconsin was a national leader in this regard as of 2011, when Walker took office with a vow to reverse that allegedly anti-business perspective of Jim Doyle.
Of course, that’s only the picture for new investments. A critical measure, no doubt, but what about all taxes on business? Each year, COST also hires Ernst & Young to do such an analysis. The study found that Wisconsin’s total taxes on business were lower than 29 states. Nationally state and local business taxes as a share of the Gross State Product ranged from 3.5 percent (Oregon and North Carolina) to 15.4 percent (Alaska) Wisconsin, at 4.7 percent, was far below the median and slightly below the the average in tax impact on businesses. Once again, this was where Wisconsin stood when Doyle stepped down from office.
I might add that the Ernst & Young analysis, though it’s more thorough than most such studies, leaves out the cost of tolls, which adds a cost for businesses in states like Illinois but not a cent in Wisconsin.
Are there other studies that make Wisconsin look worse in business taxes? Yes. The most notable is the Tax Foundation, an anti-tax group whose slap-dash reports for years did not even include a state’s property taxes. That’s rather significant, because the property tax on manufacturers in Wisconsin is very low, due to the machinery and equipment exemption, a measure created by Democratic governor Pat Lucey and which has driven down business taxes in Wisconsin and transferred the impact onto homeowners.
Some time after I wrote a Milwaukee Journal Sentinel story noting this omission by the Tax Foundation, it began to include the property tax. But the methodology of its reports is still suspect, and unlike Ernst & Young, it does not analyze taxes as a percent of Gross State Product.
Still, if you prefer the Tax Foundation’s reports, then things have gotten even worse under Walker. The group’s reports show this state ranked behind 40 states in business tax climate in 2011, based on 2010 data (Doyle’s last year), and ranked behind 42 states in 2013 (2012 data).
I doubt Walker would agree this accurately reflects what has happened on his watch, and he’d be right. It’s just a bad study and always has been.
All these studies, moreover, are merely looking at the nominal tax rates. They don’t tell you what a particular business is actually paying in taxes. That’s something that can be checked in Wisconsin, because the law allows you to request the net tax paid by companies or individuals. Former Journal Sentinel reporter Jack Norman did a study for the liberal group, Institute for Wisconsin’s Future, and found that in 2003, two out of three of the more than 54,000 corporate filers in Wisconsin paid no income tax. That included 26 of the 50 largest companies in the state.
There may be many reasons for this, but one possible factor is that the state lacks enough employees in the state Department of Revenue to go after all scoflaws. Walker’s budget proposes to hire 61 new DOR employees to upgrade the efforts to collect taxes owed and stop fraud. There is abundant evidence that such employees pay for themselves by collecting more taxes.
But Walker will obviously undercut that effort with his proposal allowing longtime scoflaws to evade the taxes they owe, because past DOR employees didn’t catch these businesses. As Mason has put it, “Nobody wants their taxes to be higher so that someone else can cheat.” But this is exactly what Walker’s proposal would accomplish.
The fixation on business taxes is particularly silly because there have been countless studies showing that differential levels of taxes are not a major factor in business location decisions. Another study found little relationship between business tax levels and job losses.
“One can certainly overstate taxes as a single factor in evaluating a state’s business climate,” as James Buchen of the WMC once confessed to Isthmus. Indeed, the group did just that, attacking Doyle relentlessly about this, even as he was handing out huge tax breaks and incentives to businesses in Wisconsin.
A much broader look at the business climate was recently done by Forbes magazine, which found that Wisconsin was the 8th worst state for business in America and was getting worse under Walker.
The rankings looked at a number of criteria: business costs, labor supply, regulatory environment, economic climate, growth prospects and quality of life. Like all such ratings, it is just a snapshot, and its hardly the last word on Walker’s attempt to make Wisconsin “open for business.”
But it does provide a cautionary note to those who think tax breaks and other giveaways to businesses are all we need to succeed. It won’t do any good to drive up corporate profits if this effort doesn’t also create jobs, improve schools and colleges and the overall quality of life in a state.
Forbes projects that Wisconsin’s job growth is likely to be second worst in the U.S. through 2016. There are many factors behind that dismal projection, but it’s a safe bet that taxes on business are at best a minor factor in the equation.