Tax Analysts Blog

Using the Tax Laws to Mess With Markets Really Doesn't Work

Posted on Jul 13, 2016

Call me old-fashioned. Call me old school. But I still adhere to the belief that a tax system should be based on a broad base and low rates. Tax everything -- a little. That system minimizes economic distortions, makes compliance and administration easier, and ultimately raises more revenue. And political machinations distorting this ideal don't work.

The latest example of the government's failure to influence the economy comes from Wisconsin. The Wisconsin Budget Project, a small but fierce outfit in Madison, released a study recently that shows the state's manufacturing and agriculture credit (MAC) did little to boost the economy or create jobs. I don't always agree with the folks at the project. In fact, I rarely agree with them. But they deserve a lot of credit for this study.

The MAC was created in 2011. The first thing you should know about it is that it's complicated. You take gross receipts less costs of goods sold and some odd indirect cost multiplier and then multiply that by a property factor (for in-state activity), and then apply the credit. I recommend reading the Department of Revenue's valiant attempt to explain how this credit works. If I were a cynic, I might think this law was less about economic development and more about keeping Wisconsin tax lawyers fully employed.

The credit will reduce income tax revenue by $284 million in 2017. The preparers of the study point out that the main beneficiaries of the tax reduction are the wealthiest Wisconsin residents. Millionaires benefit while those with moderate and low incomes are left behind. I assume that's true, but it isn't my issue. I have no particular desire to take rich people's money. But I do think that many political leaders, particularly conservatives, are tone deaf when it comes to the distributional effects of tax policy. How tone deaf? The Wisconsin Legislative Fiscal Bureau, staffed by some pretty smart folks, says that 11 people who are expected to earn more than $35 million in 2017 will receive $21 million in tax breaks under the MAC.

So it's complicated and costly. That's certainly not unusual for this type of tax law. But here's the problem. The MAC was touted as a way to spur economic development and job growth -- basically, if we cut this tax, companies will invest and manufacturing employment will increase. Only that didn't happen. Manufacturing job growth didn't change at all. Nationally, Wisconsin was ranked 25th among the states in manufacturing job growth before and after enactment.

The MAC resulted in no job growth possibly because taxes aren't the primary driver of business investment. Tax burdens matter, but more in the long run and for businesses at the margins. A system based on a broad base and low rates will further economic growth. A complicated, costly carveout for some businesses will not. The MAC proved that.

Read Comments (3)

Mike55Jul 14, 2016

The MAC strikes me as a ham-handed attempt to disguise what is, in substance, a classic double rate structure: the locals pay very little tax, while those "from away" pay a lot of tax. I'm cynical enough to believe this was the real objective of the MAC, not the investment incentive rhetoric being touted.*

The MAC's complex design serves three purposes: (1) it makes the proposal appealing to middle-class moderate voters; (2) it makes the proposal appealing to almost-but-not-quite business savvy voters (who likely think this is an exports incentive); and most importantly (3) it creates enough smoke and mirrors that it might conceivably hold up to a constitutional challenge.

*Wisconsin is a smallish single sales factor state that already uses market sourcing..... so unless your business is selling Green Bay Packers merchandise, it probably doesn't make a whole bunch of sense to relocate a factory to Wisconsin in order to claim the MAC.

Edmund DantesJul 14, 2016

I agree these small-bore tax deals for business are bad policy and don't work.

But your headline promised something different. Using the tax law to mess with the markets at the macro level really does work. Exhibit A: The enormous nonprofit sector, and the existence of bloated tax-free foundations and endowments. Exhibit B: The market for owner-occupied housing. Both of these subsidies should be eliminated, but they have worked all too well and are firmly entrenched.

Emsig BeobachterJul 19, 2016

Good analysis. However, these are examples of Congress messing with the tax code. The state just tag along.

An example of state interference with the tax code is the failure to impose sales taxes on services. Studies have shown that the service sector is significantly larger than it would have been if state sales taxes were imposed on both goods and services equally.

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