A shuffling around of tax credit funding within the state's public-private job creation agency has rekindled conversations about whether the state is devoting enough attention to its entrepreneurial economy — as well as whether tax credits are an effective engine for promoting growth in the first place.
Last month, the state's budget committee approved the Wisconsin Economic Development Corporation's request to transfer $8 million away from the Early Stage Business Investment Program, which awards tax credits to both young companies that have the potential to grow and their investors. The credits will instead now go toward the Business Development Tax Credit Program, which typically targets more established firms in Wisconsin to incentivize job creation.
Such reallocations do not require approval from the entire Legislature — just the Joint Finance Committee.
WEDC said it made the request because of high demand for the business development tax credits. It claims to have used up about $10 million of the $17 million originally provided for the program in the state budget for 2016. Given the rapid pace at which its awarding credits, it says that the $8 million additional credits is necessary.
As for the Early Stage Business Development Program, WEDC said the depletion wouldn't result in any shortfalls — they predict that of the $30 million originally allocated, only $20 million at most would have ended up being awarded to young businesses and angel investors.
But according to Joe Kirgues, one of the leaders of the startup accelerator gener8tor, the move is evidence that the state is giving short shrift to the state's "knowledge economy" — the businesses that focus more on technology and ideas, and less on creating tangible goods.
"Generally, we believe that Wisconsin should have a vibrant manufacturing economy," said Kirgues. "But we don't think there's been enough focus on positioning the knowledge economy as a stakeholder."
Kirgues said that the fact that the tax credits in the Early Stage Business Development Program weren't projected to be used up by the end of the year doesn't mean that there isn't a demand for them. Rather, he said, it shows that the state needs to be doing more to connect younger companies with those incentives. He said that he knows some young, high-growth companies that have applied for the tax credits, only to be turned down.
This isn't the first time that funds have been shifted away from the early stage tax credits. In fact, reallocations of tax credits away from the early stage business tax credits and angel investment tax credits have happened almost every year since 2009 in Wisconsin.
Kirgues sees those reallocations as being part of a broader trend.
"It's broader cash suck and resource suck away from companies that create knowledge economy jobs," said Kirgues.
Mark Maley, a WEDC spokesperson, said that the assertion that the state isn't doing enough to support younger, non-manufacturing companies is not true.
"The Early Stage Tax Credit is an important tool, and the number of credits issued last year — $18 million — hit an all-time high and was nearly 50% over the previous year," wrote Maley in an emailed statement.
Maley also pointed to other WEDC initiatives that target early-stage companies, including a micro-grant and an accelerator program.
The reallocation of WEDC resources has also become linked to broader conversations, sparked by groups like the Kauffman Foundation, about the efficacy of tax credits as tools for promoting economic growth in the first place.
Max Lynch is the co-founder of Ionic Framework, a Madison startup that's created a mobile developer platform. He says that for his own company, the shifting of tax credits really doesn't matter — such incentives have been irrelevant to Ionic. He believes there are other actions the state could take that would be more effective at nurturing the entrepreneurial environment.
"We as a company want to see more tax money going into public infrastructure and the university," he said. "We want smart people to come work for us."
University of Wisconsin economist Steve Deller said that research by and large supports the idea that tax credits aren't great tools for promoting growth.
"People aren't really that susceptive to small changes in tax code," he said. "Businesses are the exact same way. If they're offered a tax break, it won't change things all that much."
Even for smaller startups, said Deller, tax credits are only so effective.
"The problem with tax credits, is that small businesses are so focused on getting up and running, is that small businesses aren't even looking at tax credits — they're not even on the radar screen," he said.
President of the Wisconsin Technology Council Tom Still said he believes that tax credits do have a place in a state's economic development toolkit, so long as they target very specific companies, such as with the early stage business tax credit.
"I think it depends on the nature of the tax incentive," he said. "General tax credits, obviously have their limits."
Kirgues, for his part, said that while he's not an economist, he knows a lot of companies that have directly benefited from the early business tax credits. Moreover, he said, he said that the debate at hand isn't whether economic tax credits should exist in Wisconsin or not — rather, it's a question of how to use resources that have already been earmarked as tax credits.
Lynch acknowledged that it was disheartening to see resources shifted away from startups at the state level, regardless of the context.
"The future of Wisconsin are these health care and IT companies," said Lynch. "We're the ones creating jobs."
Deller said that research indeed supports that assertion as well: "In Wisconsin, it turns out the bulk of the job growth comes from young businesses, and they happen to be small."
The conversation comes as officials have turned their scrutiny to another tax credit: Legislative Fiscal Bureau report recently found that the state's manufacturing and agricultural tax credit will award $21 million in credits to 11 of the state's highest earners.