Tuesday, June 14, 2016

JFC WisGOPs continue failed strategy of WEDC giveaways > start-ups

I wanted to follow up on yesterday's Joint Finance meeting, where all 11 Republicans present on the committee voted to move $8 million from a tax write-off for start-ups and other new businesses into a "jobs" tax credit program that has notoriously overpaid companies for jobs they didn't create, possibly on the order of millions of dollars. And the fact that the program is in the Scott Walker-created slush fund known as the Wisconsin Economic Development Corporation (WEDC) makes it all the more suspicious.

Both of these tax credits are given out on a calendar year basis, instead of the July 1- June 30 state fiscal year. As the LFB’s write-up notes, WEDC was claiming that the angel and early stage seed tax credits wouldn’t use up all of the $30 million that was set aside for it in 2016, so instead of having that left-over amount go away, they wanted to move $8 million to what used to be known as the jobs tax credit.
Under WEDC's reallocation request, it anticipates that angel and early stage seed tax credits that will be issued for eligible investments made in 2016 will be in the range of $16 million to $20 million. This assumption is not unreasonable considering 2015 investments were verified as eligible to receive $18.3 million of credits. If JFC approved the reallocation request, it is estimated that the remaining $22 million of WEDC's statutory limit for verifying angel and early stage seed investment credits in 2016 would be sufficient without requiring WEDC deny credits for otherwise eligible investments.

The business development tax credit program became effective on January 1, 2016. Since the effective date of the program, eight businesses have entered into contracts with WEDC for up to $2.5 million of business development tax credits. WEDC indicates that an additional $8.1 million of credits have been committed (preliminarily allocated, but still in the contracting phase) to an additional 18 businesses….

WEDC's request states that, at the current utilization rate for the business development tax credit, it anticipates obligating the remainder of its available balance for 2016 prior to the end of the year. If the Committee were to approve WEDC's request, the available balance of business development tax credits would increase to $14,396,000 for the remainder of calendar year 2016.
Given that WEDC has only given out $10.6 million through June, and only $2.5 million has been officially granted, it seems like quite a stretch to think WEDC will give out another $14.4 million over the last 6 1/2 months of the year.

A cynical mind would ask what kind of deals are being promised behind the scenes that makes WEDC see a need to hand out so many more of these credits, and what kind of “future job announcements” will come from those deals between now and November's election (with little follow up on whether those jobs ever get created). In addition, it makes you wonder what kind of campaign kickbacks to endangered GOP politicians are being asked for in return for the increased amount of credits.

The nature of the business development tax credit also leads to a couple of other red flags. The first is that these credits can be carried over into future tax years, enabling there to be additional handouts in 2017 if all of the $14.4 million isn’t given away for 2016. What kind of favors are going to be traded with a new state budget coming up for 2017-19, and the prospect of a Governor’s election looming in 2018?

The bigger flag was pointed out by State Reps Gordon Hintz and Chris Taylor during the Joint Finance Committee hearing, and it related to the fact that unlike the early stage seed credit (which can only be offset against what someone owes in taxes), the business development tax credit is refundable, meaning it could end up in cash back to companies that don’t pay a dime to the state in taxes. Taylor and Hintz noted a passage in an LFB budget paper from last year which shows these types of credits overwhelmingly went to businesses that don’t owe taxes.
The jobs credit and enterprise zone credit are already refundable. Refundable tax credits are not affected by a claimant's tax liability and are recorded as state expenditures, instead of as revenue offsets. Therefore, they are very similar to grants in this respect as well. According to DOR, in tax year 2012, claims for the jobs credit and enterprise zones credits totaled $42.4 million. Of this amount, $2.3 million (5.5%) was used to offset the claimants' tax liability and $40.1 million (94.5%) was refunded to the claimants.
Granted, that was 4 years ago, but you can see where this type of extra “cash back” can be cause for concern, especially in light of last week’s news that WisGOP mega-donor/Trump campaign fundraiser Diane Hendricks paid zero state income tax between 2012 and 2014.

And with the recent cut in tax rates for businesses in manufacturing and agriculture to 0.4%, a whole lot of companies are going to have zero tax liability, making the refundable part of that "business development" tax credit a needed source of extra money to corporate Wisconsin. Call me crazy, but I don't really think those guys need the extra help at this point, especially when such a tax cut is leading to revenue shortfalls and cuts in education and local services that generate the talent to grow the state's economy.

Even worse is the decision to take the money from start-up funds, which not only is an area the state has badly lagged in during the Age of Fitzwalkerstan, but also is an area where demand has grown greatly in the last 3 years.

Early Stage Business Investment Credits
2013 $8.8 million
2014 $12.4 million (+40.9%)
2015 $18.3 million (+47.0%)

In a Wisconsin State Journal story from Matt DeFour describing the JFC's decision to shift of WEDC funds, I noticed this bit of absurdity coming from mouth of one of the top GOPs on the JFC.
Rep. John Nygren, R-Marinette, co-chairman of the Joint Finance Committee, knocked the Democrats for voting against attempts to invest in job creation while criticizing Republicans for the state’s job performance.

“You can’t have it both ways,” Nygren said.
"Have it both ways"? Is he kidding????? The fact that this state continues to inefficiently give away millions in tax credits to GOP donors over encouraging new businesses to grow goes a long way toward explaining why we stay in the bottom 1/3 in the nation for job growth.

So why didn't the GOP decide to let the rest of 2016 play out and see if that 40+% growth pattern in start-up credits continues? Instead, we are now capping the angel investment/early seed tax credit at $22 million for 2016 in favor of adding money to give away to established businesses who have a history of overpromising and underdelivering. And why does Fat Johnny Nygren think that throwing more money at these lazy, mediocre businesses is the way to somehow change the failed results of the last 5 years? Is he economically illiterate?

Oh wait, I know this answer. Because funneling this money to the WEDC "jobs" fund would keeps the flow of the "pay-for-play" element that has always been a key part of WEDC's existence. And not wanting to shut off the gravy train over investing in entrepreneurship and new ideas for the 21st Century economy is a telling priority for John Nygren and the rest of the WisGOPs, isn't it?


  1. Compare the attitude to refundable tax credits for corporations to the attitude toward the refundable earned income tax credit for working humans. Humans just don't matter as much, do they? Democrats would be wise to point this out.

    1. Funny that, isnt it?. Then again, the working poor dont give campaign kickbacks.

  2. So, the best way to "make government work for you" is to pay off a few republican politicians with campaign contributions.

    This makes me sick.