Here & Now

A Look At State's Manufacturing, Agriculture Tax Credit

Frederica Freyberg:

A closer look now at tax credits. The manufacturing and agriculture tax credit was passed in 2011 to help two of our cornerstone industries, but the credit will cost the state 1 1/2 billion dollars over its first seven years and it won’t get any cheaper going forward. As the legislature considers how to pay for schools and roads, part of the debate asks if this tax credit helps create jobs or if it’s just a big giveaway. Zac Schultz reports.

Zac Schultz:

Belmark has been producing food packaging materials in De Pere, Wisconsin for 40 years.

Karl Schmidt:

It’s very safe to say you go in the grocery store, you look left and right and you will see our products.

Zac Schultz:

About a decade, Belmark President Karl Schmidt decided future growth would come outside Wisconsin and they built a facility in Phoenix, Arizona. But in 2011, Republicans in the legislature slipped a tax credit into the budget that forced Belmark to rethink their business plan.

Karl Schmidt:

The tax credit itself changed that strategy and we said you know, this is now an economical place to work. We can build some scale here.

Zac Schultz:

It's called the manufacturing and ag credit or MAC for short.

Jason Culotta:

The thought was let’s take the two largest industries in the state. Manufacturing and agriculture and let’s encourage them with this credit.

Zac Schultz:

Jason Culotta is the senior director of government relations for Wisconsin Manufacturers and Commerce, the influential conservative business lobby. The tax credit didn’t actually go into effect until 2013. It started small and grew larger each year.

Jason Culotta:

The thought was, if we phase it in we can control how much it is.

Zac Schultz:

The MAC reduces the state income tax for all manufacturing and agricultural producers in the state. But 91% of the money has been claimed by manufacturers. Wisconsin’s top income tax bracket is 7.65% for individuals and 7.9% for corporate filers. In the first year, the mac cut taxes by around 2% but now that it’s fully phased in, it reduces taxes on income by 7 %. So the MAC essentially wipes out the state tax burden for about 10,000 filers.

Gordon Hintz:

It is hard to imagine there being a less effective use of an awful lot of money.

Zac Schultz:

Democrat Gordon Hintz has been criticizing the MAC for six years.

Gordon Hintz:

Year after year we’d ask for new numbers and each year those numbers got bigger and bigger and bigger.

Zac Schultz:

The MAC has cost Wisconsin $468 million in the first four years. The state now estimates it will cost nearly a billion more in the next three. The nonpartisan legislative fiscal bureau estimates for tax year 2017, the MAC will cost $228 million. 77% of that money will go to just 1,200 filers who earn more than a million dollars a years from manufacturing or agriculture production. But what really grabs critics’ attention is the top 11 filers. They earn more than $30 million a year and will each save more than $2 million on their state income taxes.

Gordon Hintz:

The goal of this cut when it was first passed, when it was phased, was to eliminate the tax liability effectively of I think some of the wealthiest people in the state of Wisconsin.

Jason Culotta:

Are there people who make a lot of money who are receiving the credit? Sure. But they’re investing in the state. They’re producing here. They’re employing a lot of people here.

Zac Schultz:

Jason Culotta of WMC argues the money from the MAC isn’t just a blank check from the state.

Jason Culotta:

So it’s their decision ultimately what they decide to do with it. Many of them invest right back into the company.

Greg Clement:

The money doesn’t go into my pocket. It goes into buying that next piece of equipment.

Zac Schultz:

Greg Clement founded Argon Industries in 2002 with four people and three machines.

Greg Clement:

The next two years I’m going to have to invest almost $2 million in new equipment.

Zac Schultz:

He now has 100 employees fabricating sheet metal components for major companies. Clements says if he doesn’t continually upgrade his quality, he’ll lose business.

Greg Clement:

This machine is from 2003. So this is where the reinvestment and the money that comes from receiving those tax credit comes into play because the technology now coming out is fully automated loading, unloading.

Zac Schultz:

He says in recent years the MAC helped him install a new powder coat line which has helped grow his business.

Greg Clement:

That was 1.5 million dollars. We added 17 employees.

Tamarine Cornelius:

Just because a manufacturing business expands doesn’t mean they’re going to be hiring.

Zac Schultz:

Tamarine Cornelius says hiring may be the exception, not the rule. She’s an analyst for the Wisconsin Budget Project, part of the non-profit Wisconsin Council on Children and Families. One of her concerns about the MAC is the lack of accountability.

Tamarine Cornelius:

There is no requirement that jobs be created. So a business could be laying off workers or sending jobs overseas or closing factories and still get the tax cut.

Zac Schultz:

She points to Oscar Mayer which is shutting down its factory in Madison. They will get the credit for every last hot dog produced before the lights are turned off for good.

Tamarine Cornelius:

If we want businesses to create jobs in return for getting this big tax cut, then we need to require them to do so.

Jason Culotta:

The four years after that credit was enacted, we saw a regain of 34,000 jobs and there have been some more gains since then.

Zac Schultz:

Culotta says the MAC has led to job growth but opponents don’t see it.

Tamarine Cornelius:

For the previous year Wisconsin lost about 4,000 manufacturing jobs.

Zac Schultz:

Hintz says much of that growth was a rebound from the great recession and took place before the credit even started.

Gordon Hintz:

We actually had more manufacturing job growth in the two years before the credit was even phased in.

Zac Schultz:

Culotta points to the increasing cost of the tax credit as evidence of success. Over the first five years it will end up costing $376 million more than originally projected.

Jason Culotta:

We think so much of that has been investment that’s been drawn from out of state or from in-state companies which would have spent in another state and now it’s being spent here.

Zac Schultz:

Belmark is a good example of that. Their Phoenix, Arizona facility was supposed to be the first of many in other states. Since the tax credit was passed, they’ve added on in De Pere.

Karl Schmidt:

We've had six additions, most recently opened up a 30,000 square foot office addition. 240 jobs we added here that would not have been here that would have been in another state.

Zac Schultz:

And there is more to come. Schmidt says for their latest facility they did a nine-state search and settled on Shawano, Wisconsin.

Karl Schmidt:

We’re going to spend $25 million there to start. There will be another $25 million investment over the next five years and employ up to 120 people.

Dave Zielke:

We're expanding the business for our next five years of our growth.

Zac Schultz:

Dave Zielke helped found Imperial Blades in 2008. They are the only manufacturer of oscillating saw blades in the United States.

Dave Zielke:

It's a big selling point for us. American-made products are really sought after.

Zac Schultz:

Imperial Blades has 55 employees.

Dave Zielke:

We're looking to hire on 10 to 15 people in the next year.

Zac Schultz:

But they’ve outgrown their Sun Prairie location so they’re adding on.

Dave Zielke:

If we didn’t have the tax credit, that could be enough where this would get delayed.

Zac Schultz:

Imperial Blades could produce the same product anywhere in the United States and Zielke gets offers to relocate to other states all the time.

Dave Zielke:

Georgia, Texas, every other week I get an email or phone call from somebody.

Zac Schultz:

But the MAC helps keep him loyal to Wisconsin.

Dave Zielke:

We’re growing profitable business but we put so much money back into this just to stay ahead of our competitors that, I mean, any little bit helps. It really does help us.

Gordon Hintz:

I’m glad that we have a couple of examples where they seem to be happy and they’ve added jobs. But overall for the state I don’t think anybody can defend this as anything but a total loser.

Zac Schultz:

Gordon Hintz says there are more than 9,000 manufacturing facilities in Wisconsin and with the MAC, essentially none of them pay state income taxes and not all of them are adding jobs.

Gordon Hintz:

I did a tour recently of a manufacturer. I asked them about the credit. And they said yeah, when we were doing our taxes last year the first thing we said is we can’t afford this. And when they were talking about we, they were talking about the state because they realized their tax liability had been eliminated and they’re a relatively small manufacturer. If that’s happening around the state, they realized just how expensive it was.

Zac Schultz:

Hintz says manufacturers who oppose it are afraid to publicly criticize the MAC but he says the true impact of the MAC is felt every two years at budget time when there isn’t enough money for schools or the university system or transportation.

Gordon Hintz:

And so you have to look at this in what has been lost in terms of priorities that the state could have been funding while it was giving this money away with no accountability?

Jason Culotta:

I hate to get into a competition because we’re adding to the pie, we’re not taking from the pie by having this credit.

Zac Schultz:

Supporters of the MAC say you can’t ignore the impact of manufacturing jobs in Wisconsin.

Greg Clement:

If more people have jobs, more people are paying into the tax system. That’s what you need. And then you will gain that money for the roads and for the schools.

Dave Zielke:

And we work with seven different vendors in Wisconsin for making our saw blades.

Karl Schmidt:

I like to look at the multiplier effect.

Zac Schultz:

Karl Schmidt can point to a number of machines that he bought from other Wisconsin manufacturers who can also claim the MAC.

Karl Schmidt:

We’re going to buy the best in the world, but it's nice that you see it’s coming from Wisconsin.

Zac Schultz:

And all the people he has employed to build his new plants.

Karl Schmidt:

We've had two great builders here, Miron and Boldt. All the block comes from County Concrete. The electricians are here.

Zac Schultz:

But in the end, this may come down to a debate about Wisconsin's priorities and Wisconsin's identity.

Gordon Hintz:

I want to support our manufacturers but just throwing a lot of money at the top with no assurances, with no accountability is not fair to the rest of the taxpayers of the state. It’s not very effective.

Greg Clement:

What is Wisconsin's core? It’s agricultural and manufacturing. That’s what we built Wisconsin on.

Frederica Freyberg:

That was Zac Schultz reporting. A study released just last week says the manufacturing and ag credit helped create more than 20,000 jobs in Wisconsin. UW-Madison Economics Professor Noah Williams looked at 21 of Wisconsin's 22 border counties. He compared their manufacturing job growth since the credit started to counties just across the border in Illinois, Iowa, Minnesota and Michigan. He then applied that growth rate to the rest of the state to reach 20,000 jobs. However, Democrats like Gordon Hintz point out Professor Williams was an advisor to Governor Scott Walker and Senator Marco Rubio in their recent presidential campaigns. Hintz says the researcher cherry picked his data pointing out the one border county that was excluded, Trempealeau County lost manufacturing jobs last year and that would have altered the numbers.