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For much of this decade, economic and income growth in Wisconsin and in other Midwest manufacturing states have lagged well behind the national growth rates. As a result, policymakers often propose and debate ideas for how the state should try to improve economic development. That became an even more significant topic of debate in the State Capitol in recent months, as the nation began sliding into a recession. In January and February, the Governor, Senate Democrats, and Republicans in both houses all unveiled their own packages of economic development proposals. This article summarizes these very different plans and examines the challenge of developing and implementing policies to promote economic development during a recession. The $652 Million Deficit In Wisconsin’s divided legislature, the task of agreeing on an economic development package would have been very difficult under even the best of circumstances. However, that challenge grew far greater in mid-February when the Legislative Fiscal Bureau announced that the state was facing a $652 million budget deficit for the remainder of the 2007-09 biennium. (A brief explanation of the deficit and ideas for how to fill the budget hole can be found on a new special section of the WCCF website at: http://www.wccf.org/budget_resources_deficit2007-09.php.) Most states have significant rainy day funds that they can tap into during a recession. Those funds are often used to address the increased utilization of benefit programs by low-income families during an economic downturn, and increased spending for benefits can have a positive “counter-cyclical” effect on a slumping economy. Unfortunately, Wisconsin has almost no money in its rainy day fund, leaving our state ill-prepared for the economic slump. One question that is often raised when a state is faced with a significant deficit caused by a recession is whether it’s better, from an economic perspective, to cut spending or increase taxes to address the budget shortfall. A recent paper by the Center on Budget and Policy Priorities (CBPP) examines that issue and states that “the aversion to raising taxes during a recession …rests on a misconception of economic effects.”(1) The CBPP paper cites an analysis of the issue by two prominent economists, Nobel Prize winner Joseph Stiglitz of Columbia University and Peter Orzag, who is now the director of the Congressional Budget Office. During the last recession, they wrote an analysis concluding that a state’s economy could be harmed more during an economic downturn by spending cuts than by tax increases, particularly if the taxes are on higher income families:
Short-Term and Longer-Term Economic Growth Plans State politicians sometimes use the term economic “stimulus” for their proposals to promote economic growth, particularly at times like this when there has been so much discussion of stimulus plans at the national level. As a result, it is sometimes unclear whether state lawmakers are seeking to provide a short-term or long-term boost to economic growth. The fact of the matter is that states have relatively little ability to provide a short-term jump start to economic growth. Unlike the federal government, states cannot simply run up debt during a downturn in order to send out tax rebate checks or increase spending. For the most part, states are playing a zero sum game, where any spending increase or new tax break has to be offset somewhere else. Although state lawmakers coping with a very tight budget or a deficit have relatively limited ability to stimulate the economy, they do have a few strategies at their disposal that can have a net positive benefit, at least over the short run. These options include:
Of course, while these types of options can help produce short-term economic benefits, not all of their attributes are positive. In the case of bonding, for example, the state is deferring costs until future years, and that could cut into future economic growth. Turning back to the topic of the alternative economic development plans that were proposed this year, the following is a brief summary of each of the three plans. Senate Democrats – Wisconsin Invests Now The Senate Democrats’ plan – Wisconsin Invests Now (SB 510) – is distinguished from the other two in several significant respects. First, it is the only one of the three initiatives that contains a funding source – closing a corporate tax loophole – to cover the cost. Second, it does not rely primarily on tax breaks to promote economic development. Third, it makes a large investment in the state’s infrastructure and workforce. Elements of their plan include the following:
To finance these programs, a corporate tax filing regime known as combined reporting would be adopted. Combined reporting would generate $90 million by limiting the ability of corporations to avoid tax by shifting income in subsidiaries in others states. Governor – Grow Wisconsin The Governor’s Grow Wisconsin plan has been expanding since its inception five years ago and it has scores of components, many of which have already been adopted. They cover topics as diverse as health care, education, tourism and quality child care. Our focus here is on the newer elements that are intended to promote economic growth. Those measures include:
Additional initiatives address fiscal management of the state; support for post-secondary education, worker training and other education initiatives; renewal energy development; investment in transportation and communications infrastructure; and regulatory reform. The full Grow Wisconsin plan, including components enacted in prior years, is outlined at: http://www.wisgov.state.wi.us/docview.asp?docid=12933. Legislative Republicans – Invest Wisconsin 2.0 The plan developed by Assembly and Senate Republicans relies primarily on new or increased tax breaks. Some of the elements include:
Invest Wisconsin would also place limits on expert witness testimony, add requirements for product liability damage awards and establish criteria for determining product liability. Conclusion As the regular 2007-08 legislative session comes to a close, it appears that none of the significant proposals for promoting economic development will be approved. Those plans were ultimately done in by their cost and by political differences of opinion about the best strategies for inducing economic growth. Although lawmakers often use the economic downturn as an argument in support of their economic development proposals, the state deficit resulting from that downturn so restricted the state’s options that lawmakers were unable to come close to reaching an agreement on development incentives. The next question is whether the Legislature will have any more success in agreeing on a plan to resolve the state’s deep budget deficit. Notes:
1. Nicholas Johnson, “Budget Cuts or Tax Increases at the State Level: Which is Preferable During an Economic Downturn?” Center on Budget and Policy Priorities, January 8, 2008, available at: http://www.cbpp.org/1-8-08sfp.htm 2. Peter Orszag and Joseph Stiglitz, “Budget Cuts vs. Tax Increases at the State Level: Is One More Counter-Productive than the Other During a Recession?” Center on Budget and Policy Priorities, revised November 6, 2001, available at http://www.cbpp.org/10-30-01sfp.htm 3. Because the revenue loss from the bill depends on investor behavior, a precise estimate of the loss is not available. In its fiscal estimate, the Department of Revenue suggested that investors whose annual income exceeds $150,000 are most likely to take advantage of the exclusion. They pay $87 million in taxes annually on capital gains, so the revenue loss is likely to be some portion of that amount.
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