The Case for the Manufacturing and Agricultural Tax Credit

By: Noah Williams

Originally published in the Wisconsin State Journal, November 2, 2019.
See full article here.

The economy in Wisconsin experienced a remarkable period of sustained economic growth from 2010 through 2018, but has entered a rough patch in 2019.

In the depths of the recession starting in late 2008, employers shed thousands of jobs each month before employment finally bottomed out in 2010. But from January 2010 through January of this year, the economy rebounded and added over 278,000 jobs. Manufacturing, a key sector employing roughly one in six workers in the state, was hit especially hard with employment falling 15% during the recession. But since hitting bottom in 2010, the sector reversed a decade-long trend of declining employment and regained roughly 54,000 jobs by the end of 2018.

While many factors undoubtedly played a role, a key force driving and supporting the economic recovery in Wisconsin was the changes in economic policy that improved the business climate in the state. Now in 2019, just as the state economy has experienced a downturn — with total employment down nearly 7,000 jobs since the start of the year and manufacturing job losses totaling 6,500 — some of those policy changes are under threat.

In particular, one of the most significant policy changes in the past decade was the manufacturing and agriculture tax credit, which greatly reduced the tax burden on a crucial sector of the state economy. In his initial budget, Gov. Tony Evers proposed dramatically scaling back the credit, effectively increasing taxes on employers. Though the Legislature kept the credit intact in the final budget signed into law, the governor and others have continued to press for repealing or substantially limiting it.

The manufacturing and agriculture tax credit has always been controversial, in part because its revenue costs are apparent but its economic benefits are harder to measure. In a 2017 research report for the Center for Research on the Wisconsin Economy, I estimated the benefits. Analyzing manufacturing and overall employment growth, I found that the tax credit helped create substantial job growth in Wisconsin.

Estimating the impact of the credit is difficult because we don’t know what would have happened if the policy had not been implemented. Previous commentators have tended to focus either on recent outcomes in the state, which does not identify the policy impact, or compared growth in Wisconsin to other states or the nation as a whole, which includes many confounding factors.

To isolate the impact of the credit from other factors, I focused on counties on either side of the Wisconsin border. Apart from state-level policy differences, these border counties share many common characteristics, and my empirical work included additional controls to better isolate the policy impact.

I found that from the time this credit took effect in 2013 through 2016 when it was fully phased in, manufacturing employment grew nearly 2 percentage points faster per year in the Wisconsin border counties relative to counties just across the border. Moreover, employment was sensitive to tax changes: Every percentage point cut in the manufacturing tax rate led to a 0.8 percentage point increase in manufacturing employment growth.

Further, the cuts in manufacturing taxes spilled over to the broader economy, with non-manufacturing employment growing 0.7 percentage points per year faster on the Wisconsin side of the border. In total, I estimated that from 2013-2016 the credit accounted for a total gain of nearly 21,000 manufacturing jobs (a 4.6% increase) and over 42,000 total jobs (a 1.8% increase) in Wisconsin.

The positive impact of the credit continued in the years after my study was completed. From 2009 through 2012, manufacturing employment grew at almost exactly the same rate in the counties on either side of the Wisconsin border. But from the introduction of the credit in January 2013 through March 2019 (the most recent county-level data), manufacturing employment has grown by a cumulative 12% in the border counties on the Wisconsin side, compared with a cumulative increase of 6.4% in the counties just over the border.

With the state economy — and manufacturing in particular — experiencing a slowdown, now would not be the time to raise taxes on employers. Instead, policymakers should apply the lessons of this tax credit to the whole economy. Rather than favoring particular industries, policymakers should continue to make the state more competitive by considering broad-based tax reform, further reducing the tax burden on employers and workers across the board.