News of Wisconsin's swelling budget shortfall and unprecedented job losses have made it clear that job creation will be the premiere theme for the 2010 gubernatorial election. Just recently, for instance, Democrat nominee Tom Barrett is sounding off like Wisconsin's leading fiscal conservative saying that "The state must play its role effectively and then get out of the way." But Barrett's plan for Wisconsin is anything but getting government out of our way.
In May, Barrett introduced a 67-page jobs plan that aims to create various councils, committees, boards, and institutes to promote economic development. His plan proposes investments in financial capital, universities, bio-fuels, biomass plants, green buildings, pension funds, minority owned businesses, dairy science, arts and culture, local transportation, quality of life communities, workforce development programs, on and on. That's a lot of state-based investment, so how much will this cost the taxpayers? In total, Barrett's plan will create more than two dozen state programs and a billion dollars in new spending.
Below, I will explore Barrett's emphasis on targeted tax cuts, his defense of Combined Reporting, and how his plan does nothing to resolve Wisconsin's poor business climate.
One of the biggest problems with Barrett's business plan is his "targeted tax cuts" proposal. On page 7 of his plan, Barrett says he will provide tax cuts, credits, and incentives to businesses that create, save, or attract jobs. But most economists prefer broad-based tax cuts to a more targeted approach; here are the reasons why.
First, targeted tax cuts create a greater distortion in the free market. All taxes, to some extent, distort free market activity. It is the job of an economist, therefore, to minimize these distortions and make the economy work efficiently. A targeted tax approach isolates specific activities for preferential treatment, which in turn alters taxpayer behavior in ways that wouldn't happen when left to free market forces. When government starts allocating resources to certain areas, things can get very complicated. It releases an uncertainty into the free market that politicians are sometimes not equipped to handle.
Second, targeted tax cuts lack neutrality and invites massive abuse. In Barrett's proposal, state government gets to pick the winners and losers; and by doing so, they reward companies for doing what they want while penalizing companies for doing what they don't want. It also invites powerful special interest groups to vie for preferential treatment in a type of "pay to play" scheme. Another term for this behavior is corporate welfare. It's an unfair practice that marginalizes smaller businesses while corporations with the most clout can get the biggest piece of the pie.
Third, the more targeted the tax cut, the more bureaucracy is needed for record keeping, tracking, monitoring, and filing purposes. And the more bureaucracy needed, the more government resources are required. Regulatory behavior not only neutralizes the economic benefit of a tax cut, but it requires increased taxes to maintain itself.
And fourth, giving tax cuts to companies already stable enough to hire new workers misses the whole point. On page 3 of Barrett's jobs proposal, he admits that "tax cuts stimulate private sector job creation." And yet he gives tax cuts to companies already creating jobs while ignoring companies that struggle to keep them. Where are the tax cuts for businesses that actually need them to create jobs?
Another problem with Barrett's jobs plan is his defense of Combined Reporting. Combined Reporting is a law passed by Wisconsin Democrats that seeks to collect more tax revenue from companies with plants or facilities in other states. Combined Reporting is a money grab by the state to help repair a profound budget hole left by the Doyle Administration, and it's expected to increase tax revenue by more than $200 million for the fiscal period of 2009-2011.
One of the more visible problems with Combined Reporting was the financial headache it caused Harley Davidson. It cost them $22 million, which is an equivalent to about 400 manufacturing jobs. Shortly after, Harley announced they were considering regrouping and possibly moving two of their plants out of the state. If this were to happen, Wisconsin could lose about 2,200 jobs. The announcement sent shock waves through the state and sent a clear message to Democrats that Wisconsin's tax climate needs some reshaping.
Defending Combined Reporting, Barrett said it was an important way to ensure that larger corporations pay their fair share of taxes in Wisconsin because it prevents them from shifting their reported incomes to "off-shore tax havens" in other states. The irony is that these companies wouldn't try to shift their reportable incomes off-shore if Wisconsin itself were a tax haven.
While companies leave the state, our leadership should be developing a plan to retain and attract more companies. Instead, Barrett defends Combined Reporting issuing statements like "there hasn't been a mass exodus of businesses", or only "11% of Wisconsin businesses will see an increase in their corporate tax liability". By minimizing the punitive tax effects of Combined Reporting, Barrett concedes the point. Wisconsin needs to attract businesses to the state, and enacting laws that increase corporate tax liabilities is like staking a big sign at the state border saying, "No Businesses are Welcome".
On page 3 of Barrett's jobs proposal, he says that "creating jobs will be his main job" and that "in the Barrett Administration, jobs will be Job One." However, on page 15 he says, "When tax dollars are used to lure businesses and spur private investment to the state, there needs to be a significant return on investment. As Governor, Tom will ensure that tax dollars for economic development are not wasted on corporate welfare or company bailouts."
And yet Barrett's policy of targeted tax cuts is the very definition of corporate welfare. The summary point is this, the fact that Barrett promotes tax cuts of any kind as a way to generate private sector jobs is a concession that taxes have and always will be a hindrance to small businesses. At the Hispanic Conservative, I went to great lengths to point out that taxes discourage market activity. If taxes on businesses pose a problem for both businesses and market activity, then why not spread more tax relief across the board? If this has proved particularly effective for Ireland, then why not Wisconsin?
In a New York Times story, Ireland reportedly found that lower corporate tax rates and better education encouraged economic prosperity. In the 1980s, Ireland began borrowing, spending, and taxing beyond its means. According to Deputy Prime Minister Mary Harney, it nearly drove them under. But Ireland's profound problems prompted them to make substantial changes.
Ireland slashed its corporate tax rate to 12.5%, which is far lower than the rest of Europe. Low corporate tax rates attracted foreign investors, and now Ireland is home to 9 of the 10 top pharmaceutical companies, 16 of the top 20 medical device companies, and 7 of the top 10 software designers in the world.
If reducing corporate tax rates attract companies, then why is Barrett defending Combined Reporting? The truth is, there is no defense for it. Combined Reporting is not about companies paying their fair share. Fairness to Democrats typically means paying more taxes, not less. And when companies are forced to pay more, it typically results in lower pay, less benefits, or worse yet, unemployment.